Related Experiment Video
Updated: Jul 8, 2026

Inverse Probability of Treatment Weighting (Propensity Score) using the Military Health System Data Repository and National Death Index
Published on: January 8, 2020
Two-stage residual inclusion estimation: addressing endogeneity in health econometric modeling
Joseph V Terza1, Anirban Basu, Paul J Rathouz
1Department of Epidemiology and Health Policy Research and Department of Economics, University of Florida, 1329 SW, 16th Street, Room 5130, Box 100147,Gainesville, FL 32610-0147, United States. jvt@ichp.ufl.edu
Abstract:
The paper focuses on two estimation methods that have been widely used to address endogeneity in empirical research in health economics and health services research-two-stage predictor substitution (2SPS) and two-stage residual inclusion (2SRI). 2SPS is the rote extension (to nonlinear models) of the popular linear two-stage least squares estimator. The 2SRI estimator is similar except that in the second-stage regression, the endogenous variables are not replaced by first-stage predictors. Instead, first-stage residuals are included as additional regressors. In a generic parametric framework, we show that 2SRI is consistent and 2SPS is not. Results from a simulation study and an illustrative example also recommend against 2SPS and favor 2SRI. Our findings are important given that there are many prominent examples of the application of inconsistent 2SPS in the recent literature. This study can be used as a guide by future researchers in health economics who are confronted with endogeneity in their empirical work.
Related Concept Videos
Strategies for Assessing and Addressing Confounding
Confounding can be addressed at both the design phase of a study and through analytical methods after data...
Confounding in Epidemiological Studies
Mechanistic Models: Compartment Models in Individual and Population Analysis
Parameters Affecting Nonlinear Elimination: Zero-Order Input, First-Order Absorption and Two-Compartment Model
When a drug is administered through a constant intravenous infusion and eliminated via nonlinear pharmacokinetics, it follows zero-order input. For example, oral drugs undergo first-order absorption upon administration and are eliminated through nonlinear pharmacokinetics.
In the case of subcutaneously administered drugs,...
Bias in Epidemiological Studies
Assumptions of Survival Analysis