Nursing Homes in General Equilibrium: Implications for Long-term Care Policies
Joint with Minjoon Lee
Nearly a third of elderly Americans will have a long-term stay in a nursing home over their lives; half will enter as private payers. The objective of this paper is to understand the effects of public policies on the nursing home entrance decision, associated long-term care costs, and individual welfare in general equilibrium. The novelty of our approach is to analyze the demand for nursing homes in an environment with endogenous supply of nursing home services. On the supply side, nursing homes decide the quality of service, out-of-pocket price, supply and allocation of beds between privately-paid and Medicaid residents, subject to the industry regulations. On the demand side, individuals, heterogeneous in health, wealth and access to alternative care, make a nursing-home entry decision. Selection into the nursing home, quality and quantity of beds and their private and social costs are jointly determined in equilibrium. The model generates nursing home use patterns across demographic groups that are consistent with the data. In the dynamic version of the model, we examine strategic behaviors arising on both sides of the market: while Medicaid induces individuals to time their consumption and nursing home entry, nursing homes influence the pool of residents via pricing and quality decisions. We show that interactions of the demand and supply sides of the nursing home market have important implications for the effects of long-term care policies.
Old, frail, and uninsured: Accounting for features of the
U.S. long-term care insurance market. Forthcoming in Econometrica.
Joint with R. Anton Braun and Karen Kopecky
Half of U.S. 50-year-olds will experience a nursing home stay before they die, and one in ten will incur out-of-pocket long-term care expenses in excess of $200,000. Surprisingly, only about 10% of individuals over age 62 have private long-term care insurance (LTCI) and LTCI takeup rates are low at all wealth levels. We analyze the contributions of Medicaid, administrative costs, and asymmetric information about nursing home entry risk to low LTCI takeup rates in a quantitative equilibrium contracting model. As in practice, the insurer in the model assigns individuals to risk groups based on noisy indicators of their nursing home entry risk. All individuals in frail and/or low income risk groups are denied coverage because the cost of insuring any individual in these groups exceeds that individual's willingness-to-pay. Individuals in insurable risk groups are offered a menu of contracts whose terms vary across risk groups. We find that Medicaid accounts for low LTCI takeup rates of poorer individuals. However, administrative costs and adverse selection are responsible for low takeup rates of the rich. The model reproduces other empirical features of the LTCI market including the fact that owners of LTCI have about the same nursing home entry rates as non-owners.
Old, Sick, Alone, and Poor: A Welfare Analysis of Old-Age Social Insurance Programs, Review of Economic Studies 84 (2017), pp.580-612.
Joint with R. Anton Braun and Karen Kopecky
All individuals face some risk of ending up old, sick, alone and poor. Is there a role for social insurance for these risks and if so what is a good program? A large literature has analyzed the costs and benefits of pay-as-you-go public pensions and found that the costs exceed the benefits. This paper, instead, considers means-tested social insurance programs for retirees such as Medicaid and food stamp programs. We find that the welfare gains from these programs are large. Moreover, the current scale of means-tested social insurance in the U.S. is too small in the following sense. If we condition on the current Social Security program, increasing the scale of means-tested social insurance by 1/3 benefits both the poor and the affluent when a payroll tax is used to fund the increase.
The Impact of Medical and Nursing Home Expenses on Savings, American Economic Journal: Macroeconomics, v. 6, July 2014, pp: 29-72.
previously circulated under title "The Impact of Medical and Nursing Home Expenses and Social Insurance Policies on Savings and Welfare."
Joint with Karen Kopecky
We consider a life-cycle model with idiosyncratic risk in earnings, out-of-pocket medical and nursing home expenses, and survival. Partial insurance is available through welfare, Medicaid, and social security. Calibrating the model to the US we show that (1) savings for old-age, out-of-pocket expenses account for 13.5 percent of aggregate wealth, half of which is due to nursing home expenses; (2) cross-sectional out-of-pocket nursing home risk accounts for 3 percent of aggregate wealth and substantially slows down wealth decumulation at older ages; (3) the impact of medical and nursing home expenses on private savings varies significantly across the lifetime earnings distribution; and (4) all newborns would benefit if social insurance for nursing home stays was made more generous.
How Important Is Human Capital? A Quantitative Theory Assessment of World Income Inequality,
Review of Economic Studies, Vol. 77(4), October 2010, pp: 1421-1449
Joint with Andrés Erosa and Diego Restuccia
Abstract: We build a model of heterogeneous individuals—who make investments in schooling quantity and quality—to quantify the importance of differences in human capital vs. total factor productivity (TFP) in explaining the variation in per capita income across countries. The production of human capital requires expenditures and time inputs; the relative importance of these inputs determines the predictions of the theory for inequality both within and across countries. We discipline our quantitative assessment with a calibration firmly grounded on US micro evidence. Since in our calibrated model economy human capital production requires a significant amount of expenditures, TFP changes affect disproportionately the benefits and costs of human capital accumulation. Our main finding is that human capital accumulation strongly amplifies TFP differences across countries: to explain a 20-fold difference in the output per worker, the model requires a 5-fold difference in the TFP of the tradable sector, vs. an 18-fold difference if human capital is fixed across countries.
Progressive Taxation in a Dynastic Model of Human Capital, Journal of Monetary Economics, Vol. 54(3), April 2007, pp: 667-685
Joint with Andrés Erosa
We develop a quantitative theory of economic inequality to investigate the effects of replacing the current U.S. progressive income tax system with a proportional one. The cross-sectional implications of the theory are used to discipline the assessment of the effects of tax policy and circumvent the lack of conclusive micro-evidence on the parameterization of the human capital production technology. We find that the elimination of progressive taxation increases steady state level of output by 12.6%, capital by 21.8%, and consumption by 13.2%. Moreover, it increases economic inequality and its persistence across generations.
A Quantitative Analysis of Inflation as a Tax on the Underground Economy, Journal of Monetary Economics, Vol. 53(4), May 2006, pp: 773-796
Inflation rates are more dispersed and are persistently higher in developing countries. This paper quantifies the importance of the public-finance motive for inflation in the presence of a tax-evading sector, the underground economy. The approach is motivated by the observation that the underground economy is especially large in poor countries. The analysis builds on a general equilibrium monetary model with two production sectors, where income in one of the sectors cannot be taxed. A benevolent government finances its budget using an optimal combination of the income tax rate and the inflation rate. The model is first calibrated to the U.S. economy and is then used for a cross-country simulation. The resulting relationships between the size of an underground economy, inflation rate, income tax rate and the share of seigniorage in the government revenue rationalize the cross-country data quantitatively well.