Abstract
We model long-term care insurance in an optimal taxation framework. Every adult decides upon the amount and type of care he purchases for his dependent parent. We consider two alternatives: nursing-home care provided by the government and home-care paid by the child with some lump-sum subsidy by the government. The only source of information asymmetry stems from the governments inability to observe the degree of altruism of the adult child for his/her parent. Further tax collection entails some social costs. In such a second best setting, we show that the quality of institutional care has to be kept relatively low and that compared to altruistic children, non-altruistic ones enjoy a high level of consumption.
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