LONG-TERM-CARE INSURANCE IN A 2-GENERATION MODEL

The purpose of this contribution is to investigate why private insuran ce 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 L TC insurance by the parent (the principal) is likely to diminish the a mount 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 LT C coverage in many cases. This finding throws serious doubts on the we lfare effects of recent moves to introduce compulsory social LTC insur ance, as, for example, in Germany.