Censored Quantile Instrumental Variable Estimates of the Price Elasticity of Expenditure on Medical Care

Abstract

Efforts to control medical care costs depend critically on how individuals respond to prices. I estimate the price elasticity of expenditure on medical care using a censored quantile instrumental variable (CQIV) estimator. CQIV allows estimates to vary across the conditional expenditure distribution, relaxes traditional censored model assumptions, and addresses endogeneity with an instrumental variable. My instrumental variable strategy uses a family member's injury to induce variation in an individual's own price. Across the conditional deciles of the expenditure distribution, I find elasticities that vary from -0.76 to -1.49, which are an order of magnitude larger than previous estimates.

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