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

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.

Replaced by

Philippe De Donder, and Marie-Louise Leroux, “Behavioral Biases and Long Term Care Annuities: A Political Economy Approach”, The B. E. Journal of Economic Analysis & Policy (Advances), vol. 14, n. 2, July 2013, pp. 551–575.

Reference

Philippe De Donder, and Marie-Louise Leroux, “Behavioral Biases and Long Term Care Annuities: A Political Economy Approach”, TSE Working Paper, n. 12-352, October 2012, revised February 2013.