Long-term care expenditures and investment decisions under uncertainty

Garcia Sanchez, Pablo;Marchiori, Luca;Pierrard, Olivier
(2023) , 35 pages

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  • Garcia Sanchez, PabloBanque centrale du Luxembourg, Département Economie et Recherche
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  • Marchiori, LucaBanque centrale du Luxembourg, Département Economie et Recherche
    Author
  • Pierrard, OlivierUCLouvain
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Abstract
Long-term care (LTC) expenditures of the elderly are high in developed countries and will grow further with population aging. In addition, LTC costs are heterogeneous across individuals and unknown early in life. In this paper, we add uncertainty over the arrival and magnitude of future LTC costs into a life-cycle model with endogenous aging, and we analyze how this affects the optimal behavior of agents. We show that uncertainty boosts precautionary savings, lowers investment in preventive care, and weakens the effectiveness of subsidies to encourage prevention. Our results therefore suggest that uncertainty should not be ignored in models that study positive or normative aspects of health investment.
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Garcia Sanchez, P., Marchiori, L., & Pierrard, O. (2023). Long-term care expenditures and investment decisions under uncertainty (LIDAM Discussion Paper IRES/2023/06). https://hdl.handle.net/2078.5/101408