Two-stage residual inclusion estimation: Addressing endogeneity in health econometric modeling
The paper focuses on two estimation methods that have been widely used to address endogeneity in empirical research in health economics and health services research--two-stage predictor substitution (2SPS) and two-stage residual inclusion (2SRI). 2SPS is the rote extension (to nonlinear models) of the popular linear two-stage least squares estimator. The 2SRI estimator is similar except that in the second-stage regression, the endogenous variables are not replaced by first-stage predictors. Instead, first-stage residuals are included as additional regressors. In a generic parametric framework, we show that 2SRI is consistent and 2SPS is not. Results from a simulation study and an illustrative example also recommend against 2SPS and favor 2SRI. Our findings are important given that there are many prominent examples of the application of inconsistent 2SPS in the recent literature. This study can be used as a guide by future researchers in health economics who are confronted with endogeneity in their empirical work.
References listed on IDEAS
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.:
- Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
- Burgess, Simon & Gregg, Paul & Propper, Carol & Washbrook, Elizabeth, 2008.
"Maternity rights and mothers' return to work,"
Elsevier, vol. 15(2), pages 168-201, April.
- Simon Burgess & Paul Gregg & Carol Propper & Elizabeth Washbrook & ALSPAC Study Team, 2002. "Maternity Rights and Mothers' Return to Work," The Centre for Market and Public Organisation 02/055, Department of Economics, University of Bristol, UK.
- Joseph P. McGarrity & Daniel Sutter, 2000. "A Test of the Structure of PAC Contracts: An Analysis of House Gun Control Votes in the 1980s," Southern Economic Journal, Southern Economic Association, vol. 67(1), pages 41-63, July.
- Alvarez, R. Michael & Glasgow, Garrett, 1999. "Two-Stage Estimation of Nonrecursive Choice Models," Political Analysis, Cambridge University Press, vol. 8(02), pages 147-165, December.
- Donald S. Kenkel & Joseph V. Terza, 2001. "The effect of physician advice on alcohol consumption: count regression with an endogenous treatment effect," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(2), pages 165-184.
- Mingshan Lu & Thomas G. McGuire, 2002. "The Productivity of Outpatient Treatment for Substance Abuse," Journal of Human Resources, University of Wisconsin Press, vol. 37(2), pages 309-335.
- Edward C. Norton & Richard C. Lindrooth & Susan T. Ennett, 1998. "Controlling for the endogeneity of peer substance use on adolescent alcohol and tobacco use," Health Economics, John Wiley & Sons, Ltd., vol. 7(5), pages 439-453.
- Jaeun Shin & Sangho Moon, 2007. "Do Hmo Plans Reduce Health Care Expenditure In The Private Sector?," Economic Inquiry, Western Economic Association International, vol. 45(1), pages 82-99, January.
- Coulson, N Edward, et al, 1995. "Estimating the Moral-Hazard Effect of Supplemental Medical Insurance in the Demand for Prescription Drugs by the Elderly," American Economic Review, American Economic Association, vol. 85(2), pages 122-126, May.
- Coulson, N.E. & Terza, J. & Neslusan, C.A. & Stuart, B., 1995. "Estimating the Moral Hazard Effect of Supplemental Medical Insurance in the Demand for Prescription Drugs by the Elderly," Papers 04-95-01, Pennsylvania State - Department of Economics.
- Michael T. French & M. Christopher Roebuck & Pierre Kébreau Alexandre, 2001. "Illicit Drug Use, Employment, and Labor Force Participation," Southern Economic Journal, Southern Economic Association, vol. 68(2), pages 349-368, October.
- Nancy J. Burnett, 1997. "Gender Economics Courses in Liberal Arts Colleges," The Journal of Economic Education, Taylor & Francis Journals, vol. 28(4), pages 369-376, December.
- White,Halbert, 1996. "Estimation, Inference and Specification Analysis," Cambridge Books, Cambridge University Press, number 9780521574464, November.
- Newey, Whitney K., 1987. "Efficient estimation of limited dependent variable models with endogenous explanatory variables," Journal of Econometrics, Elsevier, vol. 36(3), pages 231-250, November.
- Thomas Mroz & Kenneth Bollen & Ilene Speizer & Dominic Mancini, 1999. "Quality, accessibility, and contraceptive use in rural tanzania," Demography, Springer;Population Association of America (PAA), vol. 36(1), pages 23-40, February.
- John Mullahy, 1997. "Instrumental-Variable Estimation Of Count Data Models: Applications To Models Of Cigarette Smoking Behavior," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 586-593, November.
- Wooldridge, Jeffrey M, 1992. "Some Alternatives to the Box-Cox Regression Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(4), pages 935-955, November.
- Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 38(2), pages 112-134.
- Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-1271, November.
- J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
- Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-685, May.
- Richard W. Blundell & Richard J. Smith, 1989. "Estimation in a Class of Simultaneous Equation Limited Dependent Variable Models," Review of Economic Studies, Oxford University Press, vol. 56(1), pages 37-57.
- Lindrooth, Richard C. & Weisbrod, Burton A., 2007. "Do religious nonprofit and for-profit organizations respond differently to financial incentives? The hospice industry," Journal of Health Economics, Elsevier, vol. 26(2), pages 342-357, March.
- Terza, Joseph V., 1998. "Estimating count data models with endogenous switching: Sample selection and endogenous treatment effects," Journal of Econometrics, Elsevier, vol. 84(1), pages 129-154, May.
- Lee, Lung-Fei, 1979. "Identification and Estimation in Binary Choice Models with Limited (Censored) Dependent Variables," Econometrica, Econometric Society, vol. 47(4), pages 977-996, July.
- Gramm, Marshall, 2003. "The Case for Regulatory Rent-Seeking: CRA Based Protests of Bank Mergers and Acquisitions," Public Choice, Springer, vol. 116(3-4), pages 367-379, September.
- Gowrisankaran, Gautam & Town, Robert J., 1999. "Estimating the quality of care in hospitals using instrumental variables," Journal of Health Economics, Elsevier, vol. 18(6), pages 747-767, December.
- Kenneth Bollen & David Guilkey & Thomas Mroz, 1995. "Binary outcomes and endogenous explanatory variables: Tests and solutions with an application to the demand for contraceptive use in tunisia," Demography, Springer;Population Association of America (PAA), vol. 32(1), pages 111-131, February.
- Terza, J.V., 1995. "An Estimator for Nonlinear Regression Models with Endogenous Switching and Sample Selection," Papers 04-95-04, Pennsylvania State - Department of Economics.
- Meer, Jonathan & Rosen, Harvey S., 2004. "Insurance and the utilization of medical services," Social Science & Medicine, Elsevier, vol. 58(9), pages 1623-1632, May.
- John Geweke & Gautam Gowrisankaran & Robert J. Town, 2003. "Bayesian Inference for Hospital Quality in a Selection Model," Econometrica, Econometric Society, vol. 71(4), pages 1215-1238, July.
- John Geweke & Gautam Gowrisankaran & Robert J. Town, 2001. "Bayesian Inference for Hospital Quality in a Selection Model," NBER Working Papers 8497, National Bureau of Economic Research, Inc.
- John F. Geweke & Gautam Gowrisankaran & Robert J. Town, 2002. "Bayesian inference for hospital quality in a selection model," Working Paper Series 2002-18, Federal Reserve Bank of San Francisco.
- Edward C. Norton & Courtney Harold Van Houtven, 2006. "Inter-vivos Transfers and Exchange," Southern Economic Journal, Southern Economic Association, vol. 73(1), pages 157-172, July.
- Terza, Joseph V. & Tsai, Wei-Der, 2006. "Censored Probit Estimation with Correlation near the Boundary: A Useful Reparameteriztion," Review of Applied Economics, Review of Applied Economics, vol. 2(1).
- Jeff DeSimone, 2002. "Illegal Drug Use and Employment," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 952-977, October.
- Joseph Terza, 2009. "Parametric Nonlinear Regression with Endogenous Switching," Econometric Reviews, Taylor & Francis Journals, vol. 28(6), pages 555-580.
- Rivers, Douglas & Vuong, Quang H., 1988. "Limited information estimators and exogeneity tests for simultaneous probit models," Journal of Econometrics, Elsevier, vol. 39(3), pages 347-366, November.
- repec:sae:ilrrev:v:45:y:1992:i:3:p:435-451 is not listed on IDEAS
- William Greene, 1998. "Gender Economics Courses in Liberal Arts Colleges: Comment," Working Papers 98-06, New York University, Leonard N. Stern School of Business, Department of Economics. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:jhecon:v:27:y:2008:i:3:p:531-543. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If references are entirely missing, you can add them using this form.