Journal of Health Economics 24 (2005) 1174–1190 Can family caregiving substitute for nursing home care? Kerwin Kofi Charles a , Purvi Sevak b,∗ a University of Michigan and NBER, USA b Department of Economics, Hunter College, 695 Park Avenue, New York, NY 10021, USA Received 25 August 2004; received in revised form 19 April 2005; accepted 3 May 2005 Available online 24 June 2005 Abstract 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. © 2005 Elsevier B.V. All rights reserved. JEL classification: J14; I12 Keywords: Long-term care; Nursing homes; Informal care 1. Introduction Nursing homes are a costly and generally undesirable source of long-term care for the disabled elderly. As a result, they are often considered an option of last resort by ∗ Corresponding author. Tel.: +1 212 772 5404; fax: +1 212 772 5398. E-mail address: psevak@hunter.cuny.edu (P. Sevak). 0167-6296/$ – see front matter © 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.jhealeco.2005.05.001