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

   (1950 K)

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.

Published: Mullahy, John. "Much Ado Abut Two: Reconsidering Retransformation And The Two-Part Model In Health Econometrics," Journal of Health Economics, 1998, v17(3,Jun), 247-281.

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