Diffuse Bunching with Frictions: Theory and Estimation

90 Pages Posted: 12 Jul 2022 Last revised: 13 Oct 2022

See all articles by Santosh Anagol

Santosh Anagol

University of Pennsylvania - Wharton School of Business - Business Economics and Public Policy Department

Allan Davids

University of Cape Town (UCT)

Benjamin B Lockwood

University of Pennsylvania - The Wharton School

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: June 07, 2024

Abstract

We incorporate a general model of frictions into the bunching-based elasticity estimator. This model relies on fewer parameters than the conventional approach, replacing bunching window bounds with a single "lumpiness parameter," while matching rich observed bunching patterns such as sharp-peaked diffusion around tax kinks and depressed density in the dominated region above a notch. Simulations suggest that in the presence of frictions, conventional methods may underestimate elasticities with overstated confidence. Our method draws information from the spread of bunching mass around kinks and asymmetry around notches, revealing the size of frictions, unobserved costs, and kink vs. notch misperceptions. Estimating this model on South African administrative tax data, we find that individuals and firms appear to treat the bottom zero-to-positive tax kink like a notch, and we uncover differences in lumpiness between wage earners vs. the self-employed and between firms with vs. without paid tax practitioners. 

Keywords: diffuse bunching, sparsity, lumpy adjustment, optimization frictions, elasticity of taxable income, tax, small business, South Africa, bunching estimators

JEL Classification: D22, H20, H25, H30, O55

Suggested Citation

Anagol, Santosh and Davids, Allan and Lockwood, Benjamin B and Ramadorai, Tarun, Diffuse Bunching with Frictions: Theory and Estimation (June 07, 2024). Available at SSRN: https://ssrn.com/abstract=4152124 or http://dx.doi.org/10.2139/ssrn.4152124

Santosh Anagol

University of Pennsylvania - Wharton School of Business - Business Economics and Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

Allan Davids

University of Cape Town (UCT) ( email )

Private Bag X3
Rondebosch, Western Cape 7701
South Africa

Benjamin B Lockwood (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Tarun Ramadorai

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
237
Abstract Views
1,262
Rank
266,419
PlumX Metrics