Firm-Driven Management of Longevity Risk : Analysis of Lump-Sum Forward Payments in Japanese Nursing Homes

This study analyzes a unique circumstance of longevity risk management in the Japanese private nursing home market. The circumstance takes the form of a lump-sum forward payment of lifetime rent by residents, which leaves most of the longevity risk to be covered by homes. To analyze this circumstance, I construct a structural econometric model of industrial organization for this market. For the underlying structure of the longevity risk, I assume that both individual consumers and nursing homes utilizes the subjective evaluation. My empirical analysis detects excess payments that can be compensated for only by an unrealistically long stay in nursing homes. This finding implies the existence of exaggerated evaluation of longevity by economic agents. Thus, appropriate government intervention to help hedging longevity risk might improve social welfare