CESifo Economic Studies Advance Access originally published online on February 27, 2007
CESifo Economic Studies 2007 53(1):69-96; doi:10.1093/cesifo/ifm004
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Efficiency in Family Bargaining: Living Arrangements and Caregiving Decisions of Adult Children and Disabled Elderly Parents*
Medical College of Wisconsin, Milwaukee, WI, USA. e-mail: lpezzin{at}mcw.edu
Department of Economics and Olin School, Washington University; St. Louis, MO, USA and NBER, IZA and CESifo, e-mail: pollak{at}wustl.edu
Agency for Healthcare Research and Quality; Rockville, MD, USA and Georgetown University, e-mail: bschone{at}ahrq.gov
In this article, we use a two-stage bargaining model to analyze the living arrangement of a disabled elderly parent and the assistance provided to the parent by her adult children. The first stage determines the living arrangement: the parent can live in a nursing home, live alone in the community, or live with any child who has invited coresidence. The second stage determines the assistance provided by each child in the family. Working by backward induction, we first calculate the level of assistance that each child would provide to the parent in each possible living arrangement. Using these calculations, we then analyze the living arrangement that would emerge from the first stage game. A key assumption of our model is that family members cannot or will not make binding agreements at the first stage regarding transfers at the second stage. Because coresidence is likely to reduce the bargaining power of the coresident child relative to her siblings, coresidence may fail to emerge as the equilibrium living arrangement even when it is Pareto efficient. That is, the outcome of the two-stage game need not be Pareto efficient. (JEL classification: D1, J1, J2)
* An earlier version of this article appeared as NBER Working Paper No. 12358, July 2006. An even earlier version of much of the material in this article was included in ‘Long-Term Care and Family Decision Making: Coresidence and Efficiency’. We are grateful to Shelly Lundberg, Jon Skinner, and two anonymous referees for helpful comments, to Joanne Spitz for editorial assistance, and to NIH grant R01 AG24049-01 for financial support. Pollak is grateful to the John D. and Catherine T. MacArthur Foundation for their support. Earlier versions of this material were presented at Washington University in St. Louis, the University of Pennsylvania, the NBER Cohort Studies group, the University of Kansas, the 2003 ASSA meetings in Washington, DC, the 2003 ESPE meetings in New York, the University of Michigan, the University of Victoria, the University of British Columbia, Carleton University, the University of Colorado, the University of California at Riverside, Williams College, the 2006 CESifo Area Conference on Employment and Social Protection, and the University of Illinois. The views in this paper are the authors’. No official endorsement by the Agency for Healthcare Research and Quality of the Department of Health and Human Services is intended or should be inferred.