Firm-Driven Management of Longevity Risk: Analysis of Lump-Sum Forward Payments in Japanese Nursing Homes

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Abstract

This study analyzes a unique economic circumstance of longevity risk management in the Japanese private nursing home market. This circumstance takes the form of a lump-sum forward payment of lifetime rent by residents, which leaves most longevity risk to be covered by homes. To analyze this circumstance, I construct a structural econometric model of industrial organization for this market. For the underlying structure of longevity risk, I assume that both individual consumers and nursing homes utilize the subjective evaluation. My empirical analysis detects excess payments that can be compensated for only by an unrealistically long stay in nursing homes. This finding implies the existence of the exaggerated evaluation of longevity by economic agents. Thus, appropriate government intervention to help hedge longevity risk might improve social welfare.

Original languageEnglish
Pages (from-to)169-204
Number of pages36
JournalJournal of Economics and Management Strategy
Volume26
Issue number1
DOIs
Publication statusPublished - 1 Mar 2017

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