Long‐term care and intrafamily moral hazard: Optimal public policy

Abstract

The paper studies optimal public long‐term care (LTC) policy in the context of intrafamily moral hazard suggested by Pauly. The model considers a representative family consisting of an adult child and her elderly parent who might become dependent, in which case he places a special value on the LTC provided to him by his child. Since the child's caregiving is decreasing in the amount of insurance coverage, the parent prefers to underinsure, which is socially suboptimal. The child's choice of caregiving is also inefficient since she does not internalize its positive effect on the parent. The paper tackles these inefficiencies and shows that intrafamily moral hazard is a sufficient justification for public intervention targeted at insurance. If not necessarily for the introduction of mandatory public insurance, then at least for the taxation or subsidization of private insurance premiums.