Toulouse School of

This paper studies the determination of informal long-term care (family aid) to de-pendent elderly in a worst case scenario concerning the “harmony ” of family relations. Children are purely selfish, and neither side can make credible commitments (which rules out efficient bargaining). The model is based on Becker’s “rotten kid ” specifica-tion except that it explicitly accounts for the sequence of decisions. In Becker’s world, with a single good, this setting yields efficiency. We show that when family aid (and long-term care services in general) are introduced the outcome is likely to be inefficient. We identify these inefficiencies by comparing the laissez-faire (subgame perfect) equilib-rium to the first-best allocation. We initially assume that families are identical ex ante. However, the case where dynasties differ in wealth is also considered. We study how the provision of long-term care (LTC) can be improved by public policies under various informational assumptions. Interestingly, crowding out of private aid by public LTC is not a problem in this setting. With an operational bequest motive, public LTC will have no impact on private aid. More amazingly still, when the bequest motive is (ini-tially) not operational, public insurance may even enhance the provision of informal aid