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When Is the “Kennedy Correction” Appropriate in Estimating Overcharges?

Healthcare Antitrust, Settlements, and the Federal Trade Commission

ISBN: 978-1-78756-600-2, eISBN: 978-1-78756-599-9

Publication date: 29 August 2018

Abstract

In regressions using a semi-logarithmic functional form that include a dummy variable, Kennedy (1981) showed that instead of interpreting the dummy coefficient directly, one needs to “correct” it to estimate the percentage effect of the dummy variable on the dependent variable. In the context of an antitrust application, we show that when using a dummy variable to estimate the overcharge as a percentage of the actual price, one should not apply the correction proposed by Kennedy because doing so will lead to an overcharge estimate with a larger bias.

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Acknowledgements

Acknowledgments

The authors would like to thank Chris Alexander for his helpful comments. The views and opinions expressed herein are those of the authors and should not be construed as representing those of other individuals or institutions. Any errors are our own.

Citation

Li, W. and Nieberding, J.F. (2018), "When Is the “Kennedy Correction” Appropriate in Estimating Overcharges?", Healthcare Antitrust, Settlements, and the Federal Trade Commission (Research in Law and Economics, Vol. 28), Emerald Publishing Limited, Leeds, pp. 423-431. https://doi.org/10.1108/S0193-589520180000028009

Publisher

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Emerald Publishing Limited