Subsidy policy selection of elderly care service projects under uncertain actual demand: a real options analysis based on China’s experience

BACKGROUND: Elderly care service projects (ECSPs) aim to provide care services with the help of market forces on the supply side to satisfy the huge demand of the elderly. Subsidies play an important role in motivating the investors to invest in the ECSPs immediately. The optimal subsidy scheme should balance the policy costs and the investors’ interests. METHODS: Based on the policy background of China, this study applied the real options theory to compare the effects of construction subsidy and operating subsidy on achieving policy goals from the perspective of uncertain actual demand. It introduced numerical examples to identify the optimal subsidy scheme and embedded the data from the Chinese Longitudinal Healthy Longevity Survey (CLHLS) to verify the uncertainty of actual demand. RESULTS: The results showed that in the context of uncertain actual demand, operating subsidy has greater advantages in reducing investment thresholds, saving subsidy costs and increasing spillover values. Moreover, a sound quality supervision system, a differentiated operating subsidy scheme and a sustainable growth market demand environment are conducive to increasing the long-term interests of the government and the investors. CONCLUSIONS: The study emphasized the importance of subsidy selection in the context of uncertain actual demand, and provided a practical reference for policy designers in China and other developing countries to choose the optimal subsidy scheme for the ECSPs.