Behavioral Biases and Long Term Care Annuities: A Political Economy Approach

Philippe De Donder and Marie-Louise Leroux

No 749, IDEI Working Papers from Institut d'Économie Industrielle (IDEI), Toulouse

Abstract: We develop a model where individuals all have the same probability of becoming dependent and vote over the social long term care insurance contribution rate before buying additional private insurance and saving. We study three types of behavioral biases, all having in common that agents under-weight their dependency probability when taking private decisions. Sophisticated procrastinators anticipate their mistake when voting, while optimistic and myopic agents have preferences that are consistent across choices. Optimists under-estimate their own probability of becoming dependent but know the average probability while myopics underestimate both. Sophisticated procrastinators attain the Örst-best allocation while myopics and optimists insure too little and save too much. Myopics and optimists more (resp., less) biased than the median are worse o§ (resp., better o§), at the majority voting equilibrium, when private insurance is available than when it is not.

JEL-codes: D91 H55 I13 (search for similar items in EconPapers)
Date: 2012-10, Revised 2013-02
New Economics Papers: this item is included in nep-age, nep-cdm, nep-ias and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Related works:
Working Paper: Behavioral Biases and Long Term Care Annuities: A Political Economy Approach (2013)
Working Paper: Behavioral Biases and Long Term Care Annuities: A Political Economy Approach (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ide:wpaper:26382

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