A Dummy Test of Identification in Models with Bunching

28 Pages Posted: 25 Oct 2021

See all articles by Carolina Caetano

Carolina Caetano

University of Georgia

Gregorio Caetano

University of Georgia

Hao Fe

San Diego State University

Eric Reed Nielsen

Board of Governors of the Federal Reserve System

Date Written: October, 2021

Abstract

We propose a simple test of the main identification assumption in models where the treatment variable takes multiple values and has bunching. The test consists of adding an indicator of the bunching point to the estimation model and testing whether the coefficient of this indicator is zero. Although similar in spirit to the test in Caetano (2015), the dummy test has important practical advantages: it is more powerful at detecting endogeneity, and it also detects violations of the functional form assumption. The test does not require exclusion restrictions and can be implemented in many approaches popular in empirical research, including linear, two-way fixed effects, and discrete choice models. We apply the test to the estimation of the effect of a mother's working hours on her child's skills in a panel data context (James-Burdumy 2005).

Keywords: Bunching, Discrete-choice models, Endogeneity, Identification test, Linear models, Two-way fixed effects

JEL Classification: C12, C21, C23, C24

Suggested Citation

Caetano, Carolina and Caetano, Gregorio and Fe, Hao and Nielsen, Eric Reed, A Dummy Test of Identification in Models with Bunching (October, 2021). FEDS Working Paper No. 2021-68, Available at SSRN: https://ssrn.com/abstract=3948813 or http://dx.doi.org/10.17016/FEDS.2021.068

Carolina Caetano (Contact Author)

University of Georgia ( email )

Athens, GA 30602-6254
United States

Gregorio Caetano

University of Georgia ( email )

Athens, GA 30602-6254
United States

Hao Fe

San Diego State University

San Diego, CA 92182-0763
United States

Eric Reed Nielsen

Board of Governors of the Federal Reserve System ( email )

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

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