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Bilateral Intergenerational Moral Hazard: Empirical Evidence from China

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Abstract

Bilateral intergenerational moral hazard (BIMH) has been considered as one of the most important reasons for the sluggish development of private long-term care (LTC) insurance. On the one hand, the parent, who relies on child effort to avoid admission to the nursing home, may abstain from purchasing LTC insurance. On the other hand, buying LTC insurance coverage serves to protect the available bequest from the cost of LTC, thus weakening child interest in providing informal care as a substitute for formal LTC. In this paper, we investigate whether BIMH with respect to LTC exists in China. A survey conducted in October 2012 in Shanghai suggests that respondents may well exhibit BIMH as predicted by Courbage and Zweifel. However, contrary to their predictions, neither a decrease in parental wealth nor a decrease in the child’s expected inheritance are found to trigger net BIMH effects. These findings have important implications both for insurance companies planning to develop LTC products and for Chinese public policy concerning LTC.

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Notes

  1. The dependency ratio has two components, viz. people who are too young and people who are too old to work. It equals the number of individuals aged below 15 and above 64, respectively, divided by the number of individuals aged 15–64. The resident population (which includes migrants) is used when calculating the dependency ratio in Shanghai.

  2. United Nations (2011).

  3. Zhu and Jia (2009).

  4. Luo Yanhua et al. (2012).

  5. Pauly (1990), Zweifel and Strüwe (1996, 1998).

  6. Courbage and Zweifel (2011).

  7. Xu and Feng (2011).

  8. Jiang and Zhao (2012).

  9. Zhang et al. (2010).

  10. In Shanghai, for example, the annual per capita disposable income was RMB 36,230 (USD 5,805 at current exchange rates) in 2011, while the average price of housing was RMB 27,210 (USD 4,360) per square metre. At constant prices, it would thus take an ordinary family with two adults and one child the wages of almost 44 years to buy an apartment of 60 square metres (Shanghai Bureau of Statistics, 2012), implying that most young families can afford an apartment only with financial support from their parents. This gives rise to the expectation that exogenous changes such as higher initial wealth of the parent or a higher level of inheritance exogenous changes analysed by Courbage and Zweifel (2011) are of particular relevance in the case of an urban Chinese population.

  11. Brown and Finkelstein (2007).

  12. Sloan and Norton (1997), Doerpinghaus and Gustavson (2002), Courbage and Roudaut (2008).

  13. Zweifel and Strüwe (1996, 1998).

  14. Cohen-Mansfield and Wirtz (2007), Gaugler et al. (2009).

  15. People’s Bank of China (2012).

  16. Central Committee of the Communist Party of China and the State Council (2014).

  17. We thank the referee for pointing this out.

  18. Residential communities (also called residential units or residential quarters) are sections of town.

  19. The variable Know imposes linearity, which may not be supported by the data. However, splitting this variable into a set of dummy variables caused a substantial increase in multicollinearity in the data. Therefore, a (rather slight) mis-specification is accepted in return for sharper estimates of coefficients that are of crucial interest.

  20. Xu (2011).

  21. China is loosening its decades-long one-child population policy. According to a key decision issued on 15 November 2013 by the Communist Party of China, couples can have two children if one parent is the only child.

  22. Wu (2009).

  23. Xu and Wei (2013).

  24. Schoder and Zweifel (2011).

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Acknowledgements

We thank Li Wang (Fudan University) and Yu Shen (Southwestern University of Finance and Economics) for useful discussions. We also thank the anonymous reviewers for their valuable and constructive comments. We gratefully acknowledge financial support from the China Postdoctoral Science Foundation.

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Authors and Affiliations

  1. School of Economics, Fudan University, 600 Guoquan Road, Shanghai, 200433, China

    Xian Xu

  2. Department of Economics, University of Zurich, Rämistr. 71, Zurich, 8006, Switzerland

    Peter Zweifel

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  1. Xian Xu
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  2. Peter Zweifel
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Xu, X., Zweifel, P. Bilateral Intergenerational Moral Hazard: Empirical Evidence from China. Geneva Pap Risk Insur Issues Pract 39, 651–667 (2014). https://doi.org/10.1057/gpp.2014.28

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