Does it matter who cares? Formal vs. informal care of the elderly

Abstract: Rapidly aging populations in many countries present challenges not only for social welfare systems but also for younger generations. In this paper, we estimate the effects of subsidizing formal elderly care fees on seniors’ utilization of formal care services, seniors’ health outcomes, and the labor supply of their potential caregivers – their children. Leveraging a Swedish reform in a difference-in-differences design, we find that decreasing the fee for formal elderly care is associated with both reduced healthcare utilization among the elderly and increased labor supply of their children. Estimating the welfare implications of the reform, we show that subsidizing elderly care is costly for the government in the short run but becomes self-financing within a decade after the implementation.