Can family caregiving substitute for nursing home care?

Informal care should be a substitute for nursing homes but empirical evidence often suggests the opposite. This may be because informal care receipt is positively correlated with unobserved negative health characteristics. We exploit variation in children's characteristics as instruments for informal care to provide Two-Stage Least Squares (TSLS) estimates of nursing home use among a sample of 6855 individuals from the 1993-2000 waves of the AHEAD survey. While OLS results suggest informal care is associated with greater future nursing home risk, TSLS estimates show that receipt of informal care statistically and substantially reduces the risk of nursing home entry. This finding has implications for Medicaid and private long-term care insurance markets.