Journal Article

Evaluating Long-Term-Care Policy Options, Taking the Family Seriously

Daniel Barczyk and Matthias Kredler

in The Review of Economic Studies

Volume 85, issue 2, pages 766-809
Published in print April 2018 | ISSN: 0034-6527
Published online June 2017 | e-ISSN: 1467-937X | DOI: https://dx.doi.org/10.1093/restud/rdx036
Evaluating Long-Term-Care Policy Options, Taking the Family Seriously

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  • Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • Demographic Economics
  • Welfare Economics
  • Game Theory and Bargaining Theory

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Abstract

We propose a dynamic non-cooperative framework for long-term-care (LTC) decisions of families and use it to evaluate LTC policy options for the U.S. We first document the importance of informal caregiving and economic determinants of care arrangements. We then build a heterogeneous-agents model with imperfectly-altruistic overlapping generations to account for the patterns we find. A key innovation is the availability of informal care (IC), which is determined through intra-family bargaining. This opens up a new margin in response to policy and allows for informal insurance through home-production of care. Our calibrated model captures the observed care arrangements well. We study the implications of non-means-tested IC and formal care (FC) subsidies as well as changes to means-tested Medicaid. We find that IC responds strongly to these policies. An IC subsidy substantially reduces reliance on Medicaid, while the reduction of tax revenues due to lower labour supply by caregivers is modest. There are large welfare gains from a combination of IC and FC subsidies, even when combined with a reduction of the Medicaid program.

Keywords: Long-term care; altruism; dynamic games; E6; J14; D64; C73

Journal Article.  25832 words.  Illustrated.

Subjects: Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook ; Demographic Economics ; Welfare Economics ; Game Theory and Bargaining Theory

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