Instrumental Variables We want to study how having health insurance c.docx

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Instrumental Variables We want to study how having health insurance coverage influence medical expense using the data from the Medical Expenditure Panel Survey ( MEPS). In general, the relationship between medical expense and having health insurance coverage can be written as (2.1) In y = In yo + BID + B2X+, where y denotes medical expense; In yo is the intercept of the linear model. Dis a dummy variable such that D=1 denotes having health insurance; X includes all the other control variables (will be specified later). Instrumental Variables 2 points possible (graded, results hidden) 1. However, there is a problem. The medical expenses of an individual apparently depend on whether or not they have health insurance. At the same time, it is more likely that people would choose to obtain health insurance if their medical expenses are high; hence whether an individual is covered by health insurance is also affected by the medical expenses. Because of the causality can go in both directions, the linear model above cannot be estimated by an OLS directly. Which of the following best describes the problem as mentioned above? Heteroskedasticity Omitted Variable
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