Does informal care from children to their elderly parents substitute for formal care in Europe?

This paper analyzes the impact of informal care by adult children on the use of long-term care among the elderly in europe and the effect of the level of the parent’s disability on this relationship. We focus on two types of formal home care that are the most likely to interact with informal care: paid domestic help and nursing care. Using recent european data emerging from the survey on health, ageing and retirement in europe (share), we build a two-part utilization model analyzing both the decision to use each type of formal care or not and the amount of formal care received by the elderly. Instrumental variables estimations are used to control for the potential endogeneity existing between formal and informal care. We find endogeneity of informal care in the decision to receive paid domestic help. Estimation results indicate that informal care substitutes for this type of formal home care. However, we find that this substitution effect tends to disappear as the level of disability of the elderly person increases. Finally, informal care is a weak complement to nursing care, independently of the level of disability. These results highlight the heterogeneous effects of informal care on formal care use and suggest that informal care is an effective substitute for long-term care as long as the needs of the elderly are low and require unskilled type of care. Any policy encouraging informal care to decrease long-term care expenditures should take it into account to assess its effectiveness.