Handling endogeneity and nonnegativity in correlated random effects models: Evidence from ambulatory expenditure

Abstract

We describe a mixed-effects model for nonnegative continuous cross-sectional data in a two-part modelling framework. A potentially endogenous binary variable is included in the model specification and association between the outcomes is modeled through a (discrete) latent structure. We show how model parameters can be estimated in a finite mixture context, allowing for skewness, multivariate association between random effects and endogeneity. The model behavior is investigated through a large-scale simulation experiment. The proposed model is computationally parsimonious and seems to produce acceptable results even if the underlying random effects structure follows a continuous parametric (e.g. Gaussian) distribution. The proposed approach is motivated by the analysis of a sample taken from the Medical Expenditure Panel Survey. The analyzed outcome, that is ambulatory health expenditure, is a mixture of zeros and continuous values. The effects of socio-demographic characteristics on health expenditure are investigated and, as a by-product of the estimation procedure, two subpopulations (i.e. high and low users) are identified.

Keywords: Correlated random effects models; Endogenous selectivity; Health care expenditure; Multivariate mixed-type data; Two-part model.