Long-Term Care Insurance in a Two-Generation Model

The purpose of this contribution is to investigate why private insurance of the risk of long-term care (LTC) has known little market success in major industrialized countries, even among the relatively well-to-do. Using a principal-agent framework, it shows that the purchase of LTC insurance by the parent (the principal) is likely to diminish the amount of LTC provided by the major caregivers; namely children earning a comparatively low wage in the labor market. Anticipating this moral hazard effect, the parent is predicted to renounce the purchase of LTC coverage in many cases. This finding throws serious doubts on the welfare effects of recent moves to introduce compulsory social LTC insurance, as, for example, in Germany.