Other Paper

Optimal public provision of nursing homes and the role of information

Abstract

Increasing demand for long-term care poses at least four challenges to the policymaker: (i) How should care be supplied, within a nursing home or within the family? (ii) What level of care should be provided in the different arrangements? (iii) How do the answers relate to the severity of dependence? (iv) How can financial strain be mitigated for families with severely dependent members? The problems are aggravated when individual severity is the family’s private information. We consider a theoretical model of long-term care provision under adverse selection. Households who are assumed to be altruistic towards dependent members decide on the amount of care and on the context of provision: within the household or within a nursing home. Nursing homes provide more effective care for severe cases but impose a disutility from being institutionalized on all cases. The regulator sets a transfer to redistribute consumption and, where relevant, to finance public nursing homes. We derive the allocations under full and asymmetric information with and without nursing homes, respectively, and examine under which conditions nursing homes improve social welfare. Our main result is that by imposing a utility loss without offering greater effectiveness in the care for mildly dependent cases, the nursing home facilitates self-selection and mitigates and possibly eliminates distortions in caring levels and transfers. Informational asymmetries may thus lead to care being provided too often within institutions rather than within a family context.