Better Bunching, Nicer Notching

44 Pages Posted: 23 Mar 2018 Last revised: 4 Jan 2020

See all articles by Marinho Bertanha

Marinho Bertanha

University of Notre Dame - Department of Economics

Andrew H. McCallum

Federal Reserve Board

Nathan Seegert

University of Utah - Department of Finance

Date Written: December 23, 2019

Abstract

A continuous distribution of agents that face a piecewise linear schedule of incentives results in a distribution of responses with mass points located where the slope (kink) or intercept (notch) of the schedule changes. Bunching methods use these mass points to estimate an elasticity parameter, which summarizes agents' responses to incentives. This paper studies identification of the elasticity. First, a notch identifies the elasticity but a kink does not when the distribution of agents is non-parametric and continuous. Second, we propose new identification assumptions on the distribution of agents that are weaker than assumptions currently made in the literature. Our assumptions include a non-parametric shape condition which partially identifies the elasticity and two alternative semi-parametric conditions that use covariates and censored regressions to point identify the elasticity. Third, we revisit the original empirical application of the bunching estimator, which is in the economics literature that examines the largest means-tested cash transfer program in the United States. Our weaker identification assumptions result in meaningfully different estimates of the elasticity of reported income with respect to tax rates.

Keywords: partial identification, censored regression, bunching, notching, tax kink, earned income tax credit

JEL Classification: C14, H24, J20

Suggested Citation

Bertanha, Marinho and McCallum, Andrew Harrison and Seegert, Nathan, Better Bunching, Nicer Notching (December 23, 2019). 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 Harrison McCallum

Federal Reserve Board ( 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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