Behavioral biases and long term care insurance: A political economy approach

Philippe De Donder and Marie-Louise Leroux

No 2013020, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

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 first-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 off (resp., better off), at the majority voting equilibrium, when private insurance is available than when it is not.

Keywords: majority voting; myopia; optimism; sophisticated procrastinators; complementary private insurance; dependency linked annuity (search for similar items in EconPapers)
JEL-codes: D91 H55 I13 (search for similar items in EconPapers)
Date: 2013-05-17
New Economics Papers: this item is included in nep-cdm, nep-hea, nep-ias and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Journal Article: Behavioral Biases and Long-Term Care Insurance: A Political Economy Approach (2013)
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