Long-Term Care Insurance and Intra-family Moral Hazard: Fixed vs Proportional Insurance Benefits

Pauly (1990) argues that an explanation for the low long-term care (LTC) insurance demand could be intra-family moral hazard: parents might refuse to buy insurance since it reduces children’s incentives to provide care. This paper raises and explores the idea that the extent of intra-family moral hazard and non-purchase of LTC insurance might differ when insurance benefits are fixed and when they are proportional to LTC expenditures. It shows that fixed benefits limit and might even eliminate intra-family moral hazard, while the effect of proportional benefits is at best ambiguous. Consequently, non-purchase of insurance is less likely with fixed benefits.