Limited Dependent Variable Models

Example

Ani Katchova

© 2013 by Ani Katchova. All rights reserved.

 Limited Dependent Variable Models Example

 We want to study the factors influencing ambulatory expenditures.

 Data are from the 2001 Medical Expenditure Panel Survey (2001).
 Dependent variable is ambulatory expenditures
 Independent variables are age, female, and total number of chronic conditions.
 Data has 3,328 observations with 526 zero observations for the dependent variable.
 We will estimate Tobit, truncated regression, and Heckman models.

Variable Mean Mean

(censored sample, y) (truncated sample, y>0)
Ambulatory expenditures $1,387 $1,647

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Tobit model results
Ambulatory expenditures OLS regression Tobit (y*) Tobit Tobit
marginal effects marginal effects
for censored for truncated
sample (y) sample (y|y>0)
Age 253* 333* 220* 154*
Female 389* 691* 457* 320*
Chronic conditions 1093* 1261* 833* 584*
Constant -366* -1237*
Sigma 2590*

 Interpretation of the coefficients for the Tobit model: individuals who are older, female, or
have more chronic conditions have higher ambulatory expenditures. If individuals are older by
one year, they have additional $333 in “desired” or latent ambulatory expenditures.
 Interpretation of the marginal effects for the censored sample: if individuals are older by one
year, they have an additional $220 in actual ambulatory expenditures.
 Interpretation of the marginal effects for the truncated sample: for individuals with positive
expenditures -- if individuals are older by one year, they have additional $154 in ambulatory
expenditures.
 Note that the marginal effect is largest for the latent variable, then for the censored sample, and
smallest for the truncated sample.
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Truncated regression and Heckman model
Ambulatory Probit Truncated Truncated Heckman Heckman
expenditures regression regression regression regression
marginal marginal
effects effects
Age 0.13* 38823* 197* 350* 158*
Female 0.63* 45789* 232* 692* 312*
Chronic conditions 0.78* 55678* 282* 1295* 584*
Constant 0.002* -493081* -1400*
Sigma 19991* 2729*
Lambda (Mills ratio) 2005*
Rho (correlation) 0.73
Results from R are different for the truncated regression coefficients; Heckman regression R results
are slightly different.

 Interpretation of the probit model results: individuals who are older, female, or have more
chronic conditions are more likely to have positive ambulatory expenditures.
 Interpretation of the marginal effects for truncated sample: for individuals with positive
expenditures – if individuals are older by one year, they have an additional $197 (from the
truncated regression) or an additional $158 (from the Heckman regression) in ambulatory
expenditures.

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 The test of the Tobit vs the Cragg model comparing the log likelihoods shows that the Tobit
model is rejected (test statistic is 3700 for a chi-squared test).
 Note that the signs and significance of the coefficients in the probit model are the same as
those in the truncated regression and Heckman regression, but this does not have to be the case.
 Compare the coefficients and marginal effects of the one-step model (Tobit) with those of the
two-step models (Probit + truncated regression or Heckman). In this case, they are similar, but
this does not have to be the case.