Opting out and topping up reconsidered: Informal care under uncertain altruism

Abstract

We study the design of public long‐term care (LTC) insurance when the altruism of informal caregivers is uncertain. We consider non‐linear policies where the LTC transfer depends on the level of informal care, which is assumed to be observable, while children's altruism is not. Our policy encompasses two policies traditionally considered in the literature: topping up policies consisting of a transfer independent of informal care, and opting out policies entailing a positive transfer only if children fail to provide care. We show that both total and informal care should increase with the children's level of altruism. This is obtained under full and asymmetric information. Public LTC transfers, on the other hand, may be non‐monotonic. Under asymmetric information, public LTC transfers are lower than their full information level for the parents whose children are the least altruistic, while it is distorted upward for the highest level of altruism. This is explained by the need to provide incentives to highly altruistic children. In contrast to both topping up and opting out policies, the implementing contract is always such that social care increases with informal care.

The economics of long‐term care. An overview1

“…Several recent papers (Cremer et al., 2013, 2017; Canta et al., 2020; Canta & Cremer, 2021) have studied the design of optimal LTC policy under uncertain altruism, i.e. in a setting where receiving informal care from one's family is uncertain.…”

Asymmetric information, strategic transfers, and the design of long-term care policies

“…Equation ( 11) also implies that for all β < β, the optimal level of care a(β) now depends on g through the distortion term. 9 In the following, we assume that that a (β) > 0.…”

“…Specifically, the parents set a schedule (a, τ ), taking into account the government's policy and the children's incentive and participation constraints. The children's utility is then given by equation (9).…”

“…These in turn will affect their cost of providing care. Canta et al (2016) and Canta and Cremer (2020) also assume that children are heterogeneous and that their type is unknown to parents ex ante. However, these papers rule out transfers from parents to children, and informal care is exclusively motivated by altruism.…”

Asymmetric Information, Strategic Transfers, and the Design of Long-Term Care Policies

“…These in turn will affect their cost of providing care. Canta et al (2016) and Canta and Cremer (2020) also assume that children are heterogeneous and that their type is unknown to parents ex ante. However, these papers rule out transfers from parents to children, and informal care is exclusively motivated by altruism.…”