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Censored Quantile Instrumental Variable Estimates of the Price Elasticity of Expenditure on Medical Care

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  • Amanda E. Kowalski

Abstract

The extent to which consumers respond to marginal prices for medical care is important for policy. Using recent data and a new censored quantile instrumental variable (CQIV) estimator, I estimate the price elasticity of expenditure on medical care. The CQIV estimator allows the estimates to vary across the skewed expenditure distribution, it allows for censoring at zero expenditure nonparametrically, and it allows for the insurance-induced endogenous relationship between price and expenditure. For identification, I rely on cost sharing provisions that generate marginal price differences between individuals who have injured family members and individuals who do not. I estimate the price elasticity of expenditure on medical care to be stable at -2.3 across the .65 to .95 conditional quantiles of the expenditure distribution. These quantile estimates are an order of magnitude larger than previous mean estimates. I consider several explanations for why price responsiveness is larger than previous estimates would suggest.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15085.

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Date of creation: Jun 2009
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Handle: RePEc:nbr:nberwo:15085

Note: AG HC
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  1. Hausman, Jerry A, 1985. "The Econometrics of Nonlinear Budget Sets," Econometrica, Econometric Society, vol. 53(6), pages 1255-82, November.
  2. Chernozhukov, Victor & Hansen, Christian, 2008. "Instrumental variable quantile regression: A robust inference approach," Journal of Econometrics, Elsevier, vol. 142(1), pages 379-398, January.
  3. Hong H. & Chernozhukov V., 2002. "Three-Step Censored Quantile Regression and Extramarital Affairs," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 872-882, September.
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  7. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
  8. Manning, Willard G, et al, 1987. "Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment," American Economic Review, American Economic Association, vol. 77(3), pages 251-77, June.
  9. Powell, James L., 1986. "Censored regression quantiles," Journal of Econometrics, Elsevier, vol. 32(1), pages 143-155, June.
  10. Newhouse, Joseph P. & Phelps, Charles E. & Marquis, M. Susan, 1980. "On having your cake and eating it too : Econometric problems in estimating the demand for health services," Journal of Econometrics, Elsevier, vol. 13(3), pages 365-390, August.
  11. Keeler, Emmett B. & Rolph, John E., 1988. "The demand for episodes of treatment in the health insurance experiment," Journal of Health Economics, Elsevier, vol. 7(4), pages 337-367, December.
  12. Willard G. Manning Jr. & Charles E. Phelps, 1979. "The Demand for Dental Care," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 503-525, Autumn.
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