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Much Ado About Two: Reconsidering Retransformation and the Two-Part Model in Health Economics

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  • John Mullahy

Abstract

In health economics applications involving outcomes (y) and covariates (x), it is often the case that the central inferential problems of interest involve E[y|x] and its associated partial effects or elasticities. Many such outcomes have two fundamental statistical properties: yò0; and the outcome y=0 is observed with sufficient frequency that the zeros cannot be ignored econometrically. Common approaches to estimation in such instances include Tobit, selection, and two-part models. This paper (1) describes circumstances where the standard two-part model with homoskedastic retransformation will fail to provide consistent inferences about important policy parameters; and (2) demonstrates some alternative approaches that are likely to prove helpful in applications.

Suggested Citation

  • John Mullahy, 1998. "Much Ado About Two: Reconsidering Retransformation and the Two-Part Model in Health Economics," NBER Technical Working Papers 0228, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberte:0228
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    References listed on IDEAS

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    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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