On insuring and caring for parents' long-term care needs

When adult children are financially responsible for their parents, they can take considerable interest in the amount of their parents' long-term care (LTC) insurance. In this paper, we look at the optimal levels of LTC insurance and of informal care, and at the link between these two decisions when the child, who provides informal care, is also the decision-maker with regard to LTC insurance. Interestingly, results differ depending on the degree of both parental and child altruism and indicate either complementarity or substitutability between insurance and informal care. In particular, we show in the presence of child altruism that insurance stimulates the offer of informal care, contrary to the case where the insurance decision is made by the elderly parent. We also investigate how exogenous shocks with respect to the opportunity cost of informal care, initial wealth levels and bequests modify simultaneously the optimal level of insurance and informal care. (C) 2012 Elsevier B.V. All rights reserved.