Long-term care expenditures and investment decisions under uncertainty

Abstract. Long-term care (LTC) expenditures of the elderly are high in developed coun- tries and will grow further with population aging. In addition, LTC costs are heterogeneous across individuals and unknown early in life. In this paper, we add uncertainty over the arrival and magnitude of future LTC costs into a life-cycle model with endogenous aging, and we analyze how this affects the optimal behavior of agents. We show that, compared to a deterministic model, uncertainty boosts precautionary savings, lowers investment in pre- ventive care, and weakens the effectiveness of subsidies to encourage prevention. Our results therefore suggest that uncertainty should not be ignored in models that study positive or normative aspects of health investment.
JEL Codes: C60, D15, D81, I12, I18.
Keywords: health; long-term care costs; uncertainty; stochastic model.