Bayesian analysis of the two‐part model with endogeneity: application to health care expenditure

This paper studies the effect of managed care on medical expenditure using a model in which the insurance status is assumed to be endogenous. Insurance plan choice is modeled through the multinomial probit model. The medical expenditure variable, the outcome of interest, has a significant proportion of zeros that are handled using the two‐part model, extended to handle endogenous insurance. The estimation approach is Bayesian, based on the Gibbs Sampler. The model is applied to a sample of 20 460 individuals obtained from the Medical Expenditure Panel Survey. The results provide substantial evidence of selectivity. Copyright © 2006 John Wiley & Sons, Ltd.