Social long-term care insurance with two-sided altruism

This paper studies the design of a social long-term care (LTC) insurance when altruism is two-sided. The laissez-faire solution is not efficient, unless there is perfect altruism. Under full information, the first-best can be decentralized by a linear subsidy on informal aid, a linear tax on bequests when the parent is dependent and state specific lump-sum transfers which provide insurance. We also study a second-best scheme comprising a LTC benefit, a payroll tax on children's earnings and an inheritance tax. This scheme redistributes resources across individuals and between the states of nature and the tax on children's labor enhances informal care to compensate for the children's possible less than full altruism.