Better Bunching, Nicer Notching

46 Pages Posted: 23 Mar 2018 Last revised: 24 Jun 2023

See all articles by Marinho Bertanha

Marinho Bertanha

University of Notre Dame - Department of Economics

Andrew H. McCallum

Board of Governors of the Federal Reserve System

Nathan Seegert

University of Utah - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 12, 2023

Abstract

This paper studies the bunching identification strategy for an elasticity parameter that summarizes agents' responses to changes in slope (kink) or intercept (notch) of a schedule of incentives. We show that current bunching methods may be very sensitive to implicit assumptions in the literature about unobserved individual heterogeneity. We overcome this sensitivity concern with new non- and semi-parametric estimators. Our estimators allow researchers to show how bunching elasticities depend on different identifying assumptions and when elasticities are robust to them. We follow the literature and derive our methods in the context of the iso-elastic utility model and an income tax schedule that creates a piece-wise linear budget constraint. We demonstrate bunching behavior provides robust estimates for self-employed and not-married taxpayers in the context of the U.S. Earned Income Tax Credit. In contrast, estimates for self-employed and married taxpayers depend on specific identifying assumptions, which highlight the value of our approach. We provide the Stata package "bunching" to implement our procedures.

Keywords: partial identification, censored regression, bunching, notching

JEL Classification: C14, H24, J20

Suggested Citation

Bertanha, Marinho and McCallum, Andrew H. and Seegert, Nathan, Better Bunching, Nicer Notching (June 12, 2023). Available at SSRN: https://ssrn.com/abstract=3144539 or http://dx.doi.org/10.2139/ssrn.3144539

Marinho Bertanha (Contact Author)

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

Andrew H. McCallum

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.andrewhmccallum.com

Nathan Seegert

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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