Explaining the long-term care insurance puzzle: The role of preferences for correlation and for quality of life over wealth

Abstract

The paper investigates the role of two demand-side determinants of long-term care insurance: correlation preference and relative preference for quality of life over wealth. We model the effect of those preferences on the joint decision to buy long-term care and long-term care insurance contract. We test the model using data from a laboratory experiment in France. While the experimental results offer only partial support for the theoretical predictions—specifically, correlation aversion does not account for over-insurance, our analysis provides evidence that correlation seeking and the relative preference for quality of life over wealth explain the limited uptake of long-term care insurance.