Address correspondence to Joseph V. Terza, Department of Epidemiology and Health Policy Research and Department of Economics, University of Florida, 1329 SW 16th Street, Room 5130, PO Box 100147, Gainesville, FL 32610-0147. W. David Bradford is with the Department of Health Administration and Policy, Center for Health Economic and Policy Studies, Medical University of South Carolina, Charleston, SC. Clara E. Dismuke is with the Center for Health Economic and Policy Studies, Medical University of South Carolina, Charleston, SC.
The Use of Linear Instrumental Variables Methods in Health Services Research and Health Economics: A Cautionary Note
Version of Record online: 26 NOV 2007
© Health Research and Educational Trust
Health Services Research
Volume 43, Issue 3, pages 1102–1120, June 2008
How to Cite
Terza, J. V., Bradford, W. D. and Dismuke, C. E. (2008), The Use of Linear Instrumental Variables Methods in Health Services Research and Health Economics: A Cautionary Note. Health Services Research, 43: 1102–1120. doi: 10.1111/j.1475-6773.2007.00807.x
- Issue online: 26 NOV 2007
- Version of Record online: 26 NOV 2007
- nonlinear models;
- health economics
Objective. To investigate potential bias in the use of the conventional linear instrumental variables (IV) method for the estimation of causal effects in inherently nonlinear regression settings.
Data Sources. Smoking Supplement to the 1979 National Health Interview Survey, National Longitudinal Alcohol Epidemiologic Survey, and simulated data.
Study Design. Potential bias from the use of the linear IV method in nonlinear models is assessed via simulation studies and real world data analyses in two commonly encountered regression setting: (1) models with a nonnegative outcome (e.g., a count) and a continuous endogenous regressor; and (2) models with a binary outcome and a binary endogenous regressor.
Principle Findings. The simulation analyses show that substantial bias in the estimation of causal effects can result from applying the conventional IV method in inherently nonlinear regression settings. Moreover, the bias is not attenuated as the sample size increases. This point is further illustrated in the survey data analyses in which IV-based estimates of the relevant causal effects diverge substantially from those obtained with appropriate nonlinear estimation methods.
Conclusions. We offer this research as a cautionary note to those who would opt for the use of linear specifications in inherently nonlinear settings involving endogeneity.