Sample selection correction in panel data models when selectivity is due to two sources

This paper proposes a specification of Wooldridge's (1995) two step estimation method in which selectivity bias is due to two sources rather than one. The main objective of the paper is to show how the method can be applied in practice. The application concerns an important problem in health economics: the presence of adverse selection in the private health insurance markets on which there exists a large literature. The data for the empirical application is drawn from the 2003/2004 Medical Expenditure Panel Survey in conjunction with the 2002 National Health Interview Survey.