GCER Featured Research Profile Series

Current Featured Research Profile:

Winter/Spring 2017-2018

Child Care in Reverse: GCER Fellow Ami Ko explores the subtle effects of informal health care on the long-term care insurance market.

ecAlmost 60 percent of 65 year-olds can expect to spend $100,000 on assisted care for the remainder of their lives. The costs include payments for nursing homes, assisted living facilities, and contractual in-home care. Despite the risk of incurring these substantial costs, fewer than one in ten seniors have long-term care (LTC) insurance. 

In her recent paper, ``An Equilibrium Analysis of the Long-Term Care Insurance Market," Georgetown economist and GCER Fellow Ami Ko studies how informal care --- unpaid help provided by adult children --- can explain the dearth of  LTC insurance.  

Those that need long-term care  often require assistance with basic daily tasks. Because this assistance does not always require professional training, informal care provided by adult children substitutes for market-provided services. In fact, over 60 percent of elderly parents with functional limitations rely on their children for help. 

Because an individual who expects to receive informal care from his/her children may be less willing to purchase LTC insurance, the prevalence of informal care has implications for the insurance market. Yet, insurance companies do not collect information about informal care. As a result, consumers possess significant private information about their risks. This information asymmetry can result in adverse selection where only high-risk consumers who have limited access to informal care purchase insurance. 

Professor Ko finds that adverse selection does occur in the LTC insurance  market. She develops and estimates a structural model of the family where elderly parents and adult children interact  to make  long-term care decisions. Ko then uses the model to demonstrate that the likelihood of receiving informal care from children is a crucial factor in determining an individual's nursing home risks and the individual's willingness to pay for long-term care insurance. Ko finds that there is substantial adverse selection based on this key dimension of private information --- the availability of informal care. In equilibrium, the insurance market suffers from an underinsurance problem in which  high-risk consumers with limited access to informal care drive out low-risk consumers with better access to informal care. 

Using her model, Professor Ko also finds another interesting reason for why many elderly parents do not want LTC insurance; they worry that once they purchase insurance, their children will not help them with long-term care needs. In other words, parents worry that purchasing insurance may result in  family moral hazard, where children reduce their caregiving behaviors in response to their parents' insurance coverage. This family moral hazard effect reduces parents' value for insurance, and this in turn, further depresses the market for LTC insurance. 

Finally, she shows that if insurance companies collected information about consumers' children and priced their contracts based on that information, the equilibrium coverage rate would be much higher. This is because such child demographic-based pricing reduces the information asymmetry, and consequently mitigates the problem of adverse selection. Her findings emphasize the importance of considering substitutes (informal care) for insurance market efficiency.

Previously Featured Research Profiles:

Fall/Winter 2016-2017 Featured Research Profile: Markets with Search and Matching Frictions: Georgetown economists James Albrecht and Susan Vroman discuss directed search in the housing market.

Fall/Winter 2015-2016 Featured Research Profile: How (not) to run a bank: Georgetown economist Martin Ravallion examines World Bank successes and failures.

Spring/Summer 2015 Featured Research Profile: Leaning in,... sort of: Georgetown economist Mary Ann Bronson explores reasons why men and women make different post-secondary educational investments.

Fall 2014 Featured Research Profile: Carbon emissions make the global economy tipsy... Harrison and Lagunoff study a "business-as-usual" scenario in a tipping model.

Spring 2014 Featured Research Profile: Collateral Damage to Standard Economic Theory... GCER Fellow Dan Cao shows how incorrect beliefs can fuel a crisis.

Fall 2013 Featured Research Profile: Oh what a tangled web we weave... Anderson and Smith explore the dilemmas of deception.

Winter/Spring 2013 Featured Research Profile: Unintended Consequences in the Struggle for Equal Rights: Anderson and Genicot explore the surprising relationship between suicides and female property rights in India.

Fall 2012 Featured Research Profile: Gale and O'Brien sing the blues over Use-or-Lose!

Spring/Summer 2012 Featured Research Profile:"What a piece of work is a man! How noble in Reason! How infinite in faculties!" ... But how much is he worth? Huggett and Kaplan provide an answer.

Winter 2012 Featured Research Profile: Happiness is in the air! Levinson uses happiness surveys to put a dollar value on air quality.

Fall 2011 Featured Research Profile: Junior, the Risky Investment, Grandma, the Insurance Contract, and other bedtime stories as told by Gete and Porchia.

Spring/Summer 2011 Featured Research Profile: Ludema, Mayda, and Mishra show that when firms talk, governments listen.

Winter 2011 Featured Research Profile: Bachmann and Bai examine the effects of wealth bias in the policy process.