Endogenous Altruism, Redistribution, and Long-Term Care

Abstract

Abstract This paper studies public provision of long-term care insurance in a world in which family assistance is (i) uncertain and (ii) endogenous, depending on the time parents spend raising their children. Public benefits will be paid in case of disability but cannot be combined with self-insurance or family aid. The benefits are provided equally to all recipients and financed by a proportional payroll tax. The paper shows that tax distortions imply that full insurance is undesirable. It characterizes the optimal tax and identifies the elements that determine its size. Of crucial importance are the extent of under-insurance, the effect of the tax on the probability of altruism, the distortionary effect of the tax, and, with wage heterogeneity, the covariance between the social marginal utility of lifetime income and (i) earnings (positive effect) and (ii) the probability of altruism default (negative effect).