Working Paper Series, Uppsala Center for Fiscal Studies, Department of Economics, Uppsala University
How Much Should We Trust Regression-Kink-Design Estimates?
Abstract: In a Regression Kink (RK) design with a finite sample, a
confounding smooth nonlinear relationship between an assignment variable
and an outcome variable around a threshold can be spuriously picked up as a
kink and result in a biased estimate. In order to investigate how well RK
designs handle such confounding nonlinearity, I firstly implement Monte
Carlo simulations and then study the effect of fiscal equalization grants
on local expenditure using a RK design. Results suggest that RK estimation
with a confounding nonlinearity often suffers from bias or imprecision and
estimates are credible only when relevant covariates are controlled for.
Keywords: Regression Kink Design; Endogenous regressors; Intergovernmental grants; Flypaper effect; (follow links to similar papers)
JEL-Codes: C13; C21; H71; H72; H77; (follow links to similar papers)
19 pages, November 11, 2013
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