Long-Term Care Expenditures and Investment Decisions Under Uncertainty

Long-term care (LTC) expenditures of the elderly are high in developed countries 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 uncertainty boosts precautionary savings, lowers health investment, and weakens the effectiveness of health investment subsidies. Our results therefore suggest that uncertainty should not be ignored in models that study positive or normative aspects of health investment