Much ado about two: Reconsidering retransformation and the two-part model in health econometrics

Listed in:

• Analysis of survey data
• Theoretical frameworks
• Impact of tax on tobacco use

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: y≥0; and the outcome y=0 is observed with sufficient frequency that the zeros cannot be ignored econometrically. 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.