SMU SOE Seminar Series (April 11, 2025): Services and Cash: How Long-term Care Insurance Benefit Design Affects Household Behavior in China

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ABSTRACT

This study analyzes the effects of China’s long-term care insurance (LTCI) benefit design on household consumption and intergenerational support. The program provides two benefit options: in-kind benefits (or services) and cash allowances. We introduce a conceptual framework to analyze economic decision making under the two types of LTCI benefits. Using an empirical framework that exploits variations in LTCI benefit designs across China’s pilot cities, we find that both types of LTCI benefits increase household consumption and reduce medical expenditure. Specifically, ‘mixed’ benefits households – those with a choice between in-kind and cash benefits – significantly increase spending on food and housing, while households receiving services spend more on housing, transport, and clothing. Additionally, in-kind benefit recipients report receiving lower informal care from their children, implying a substitution with formal care. Households with mixed benefits experience a decline in financial support from children, suggesting a crowding-out of intergenerational transfers. Finally, we estimate income and substitution effects that are implicit in recipients’ behavior to analyze welfare implications under China’s LTCI.

Keywords: Long-term Care Insurance, Benefit Design, In-kind Benefits, Cash Benefits, Household Consumption, Intergenerational Support.

JEL: I11, I13, I18, D10.

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