Empirical Project - Assignment 2 (week 2) Determinants of health care decisions
Purpose
The purpose of this assignment is to familiarize students with the empirical application of instrumental variables methods. You will compare IV/TSLS estimators with OLS estimators and consider some of the subtleties involved when considering instrumental variables. To test for the necessity of using instruments and test the validity of the instruments. You will investigate an interesting economic question involving (adverse) selection and moral hazard. OLS seems inappropriate here, but will instrumental variables estimators solve all problems?
Report:
Write a report of maximally two pages (A4, times new roman 12 pnts or equivalent) a short analysis of the determinants of health care decisions. Use the common structure: Title, Authors, Abstract. (all of which can be on the front page) Then on the two subsequent pages: 1 Introduction. 2. Theoretical background and method. 3 Data. 4 Results and preferred empirical model. 5. Conclusion. 6. Appendix (this is in addition to the two pages and should contain all the background material and regressions, specification tests etc.
The questions posed are there to help you to think about problems involved. You should not put questions and answers in the appendix. The appendix should only contain informa- tion and details to back up claims you make in the report.
Submit a pdf version of this report before Friday 11 June 23:59 on Canvas. Also upload your Stata do file, which should run properly and contain some brief comments on what you have done. Do not forget the names and student numbers of all group members.
Assessment:
This assignment will be marked out of 10. It is worth 20% of the final mark for the course ’Empirical Project’.
Literature:
Heij, C., Boer, P. de, Franses, P.H., Kloek, T. and Dijk, H.K. van, 2004, Econometric Methods with Applications in Business and Economics, Oxford University Press;
Harmon, C., and Walker, I., 1995, Estimates of the economic return to schooling for the United Kingdom, American Economic Review, vol. 85, pp.1278-1286.
Shen, C., 2013, Determinants of health care decisions: insurance, utilization, and ex- penditures, Review of Economics and Statistics, vol. 95, pp. 142-153.
Background:
Shen (2013) analyses the relation between health expenditure and health insurance. Being insured or not will depend on the expected health costs (adverse selection) which can depend on private information the insurance taker has, but not the insurance company (asymmet- ric information). Finally, the health care consumed and cost incurred will depend on the presence of the individuals health insurance (moral hazard). Given the endogeneity, OLS is inconsistent and the standard solution is to use instrumental variables and TSLS. Shen (2013) also solves a number of other problems including for instance the fact that there are so many observations with zero expenditure. The paper also uses semi-parametric methods (which do not make specific assumptions on the underlying disturbance term, as is done in ML) but ignores the zero observations. You will also revisit the issue of zero observations in this assignment.
Data:
Description: Medical Expenditure Panel Survey (MEPS), cohort 2011 (HC-147 2011 Full Year Consolidated Data File), Pseudo panel of US household survey data since 1996. Every member of a household is being interviewed (parents answer for young children). The data have been restricted to individuals older than 18 because of missing information for younger individuals. The resulting number of observations is 25465. There are three measurements per year which sometimes gives additional information (see below)
Additional information: http://meps.ahrq.gov/mepsweb/data_stats/data_overview.jsp
and on Canvas.
Specific data for the assignment: 10 separate STATA files are available. It is the last digit of the the first student named on the assignment (and names should be in alphabetical order). So if this is a 0 you use the 6528 observations in data2_0.dta.
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