Scandinavian Working Papers in Economics

Working Paper Series, Center for Fiscal Studies,
Uppsala University, Department of Economics

No 2013:15: How Much Should We Trust Regression-Kink-Design Estimates?

Michihito Ando ()
Additional contact information
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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