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Use of instrumental variables in the presence of heterogeneity and self-selection: an application to treatments of breast cancer patients

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Author Info
Anirban Basu
James J. Heckman
Salvador Navarro-Lozano (Department of Economics, University of Wisconsin-Madison, Madison, WI, USA)
Sergio Urzua (Department of Economics, Northwestern University, Chicago, IL, USA)

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Abstract

Instrumental variable (IV) methods are widely used in the health economics literature to adjust for hidden selection biases in observational studies when estimating treatment effects. Less attention has been paid in the applied literature to the proper use of IVs if treatment effects are heterogeneous across subjects and individuals select treatments based on expected idiosyncratic gains or losses from treatments. In this paper we compare conventional IV analysis with alternative approaches that use IVs to estimate treatment effects in models with response heterogeneity and self-selection. Instead of interpreting IV estimates as the effect of treatment at an unknown margin of patients, we identify the marginal patients and we apply the method of local IVs to estimate the average treatment effect and the effect on the treated on 5-year direct costs of breast-conserving surgery and radiation therapy compared with mastectomy in breast cancer patients. We use a sample from the Outcomes and Preferences in Older Women, Nationwide Survey which is designed to be representative of all female Medicare beneficiaries (aged 67 or older) with newly diagnosed breast cancer between 1992 and 1994. Our results reveal some of the advantages and limitations of conventional and alternative IV methods in estimating mean treatment effect parameters. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/hec.1291
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

Volume (Year): 16 (2007)
Issue (Month): 11 ()
Pages: 1133-1157
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Handle: RePEc:wly:hlthec:v:16:y:2007:i:11:p:1133-1157

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/5749

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. James J. Heckman & Sergio Urzua & Edward J. Vytlacil, 2006. "Understanding Instrumental Variables in Models with Essential Heterogeneity," NBER Working Papers 12574, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Claxton, Karl, 1999. "The irrelevance of inference: a decision-making approach to the stochastic evaluation of health care technologies," Journal of Health Economics, Elsevier, vol. 18(3), pages 341-364, June. [Downloadable!] (restricted)
  3. James Heckman & Salvador Navarro-Lozano, 2004. "Using Matching, Instrumental Variables, and Control Functions to Estimate Economic Choice Models," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 30-57, 08. [Downloadable!] (restricted)
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  4. James J. Heckman & Edward Vytlacil, 2001. "Policy-Relevant Treatment Effects," American Economic Review, American Economic Association, vol. 91(2), pages 107-111, May. [Downloadable!] (restricted)
  5. Imbens, Guido W & Angrist, Joshua D, 1994. "Identification and Estimation of Local Average Treatment Effects," Econometrica, Econometric Society, vol. 62(2), pages 467-75, March. [Downloadable!] (restricted)
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  6. Jack Hadley & Daniel Polsky & Jeanne S. Mandelblatt & Jean M. Mitchell & Jane C. Weeks & Qin Wang & Yi-Ting Hwang, 2003. "An exploratory instrumental variable analysis of the outcomes of localized breast cancer treatments in a medicare population," Health Economics, John Wiley & Sons, Ltd., vol. 12(3), pages 171-186. [Downloadable!]
  7. James J. Heckman & Edward Vytlacil, 2005. "Structural Equations, Treatment Effects, and Econometric Policy Evaluation," Econometrica, Econometric Society, vol. 73(3), pages 669-738, 05. [Downloadable!] (restricted)
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  8. James J. Heckman & Edward J. Vytlacil, 2000. "Local Instrumental Variables," NBER Technical Working Papers 0252, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Anirban Basu & Willard G. Manning & John Mullahy, 2004. "Comparing alternative models: log vs Cox proportional hazard?," Health Economics, John Wiley & Sons, Ltd., vol. 13(8), pages 749-765. [Downloadable!]
  10. LaLonde, Robert J, 1986. "Evaluating the Econometric Evaluations of Training Programs with Experimental Data," American Economic Review, American Economic Association, vol. 76(4), pages 604-20, September. [Downloadable!] (restricted)
  11. M. Christopher Auld, 2005. "Causal effect of early initiation on adolescent smoking patterns," Canadian Journal of Economics, Canadian Economics Association, vol. 38(3), pages 709-734, August. [Downloadable!] (restricted)
  12. Heckman, James J & Honore, Bo E, 1990. "The Empirical Content of the Roy Model," Econometrica, Econometric Society, vol. 58(5), pages 1121-49, September. [Downloadable!] (restricted)
  13. Heckman, James J. & Vytlacil, Edward J., 2000. "The relationship between treatment parameters within a latent variable framework," Economics Letters, Elsevier, vol. 66(1), pages 33-39, January. [Downloadable!] (restricted)
  14. Yitzhaki, Shlomo, 1996. "On Using Linear Regressions in Welfare Economics," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(4), pages 478-86, October.
  15. James J. Heckman & Jeffrey A. Smith, 1998. "Evaluating the Welfare State," NBER Working Papers 6542, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Carneiro, Pedro & Hansen, Karsten T. & Heckman, James J., 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College Choice," IZA Discussion Papers 767, Institute for the Study of Labor (IZA). [Downloadable!]
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  1. Wagstaff, Adam, 2008. "Fungibility and the Impact of Development Assistance: Evidence from Vietnam's Health Sector," Policy Research Working Paper Series 4800, The World Bank. [Downloadable!]
  2. Etienne Dumont & Bernard Fortin & Nicolas Jacquemet & Bruce Shearer, 2007. "Physicians’ Multitasking and Incentives: Empirical Evidence from a Natural Experiment," IZA Discussion Papers 3229, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  3. Andrew M. Jones, 2007. "Identification of treatment effects in Health Economics," Health Economics, John Wiley & Sons, Ltd., vol. 16(11), pages 1127-1131. [Downloadable!]
  4. Walters, Lurleen M. & Emerson, Robert D. & Iwai, Nobuyuki, 2008. "Proposed Immigration Policy Reform & Farm Labor Market Outcomes," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6285, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
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