Michihito Ando ()
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Michihito Ando: Uppsala Center for Fiscal Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
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
JEL-codes: C13; C21; H71; H72; H77
19 pages, November 11, 2013
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203894_201315.pdf
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