Using Notches to Uncover Optimization Frictions and Structural Elasticities¶
Kleven, H. J., & Waseem, M. (2013). Using Notches to Uncover Optimization Frictions and Structural Elasticities: Theory and Evidence from Pakistan. The Quarterly Journal of Economics, 128(2), 669-723.
Cited by¶
2 citations across 2 artifacts.
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Mechanisms¶
- Data Binning
- Its characteristic failure is the cliff at the boundary: two nearly-identical cases straddling a cut-point receive sharply different treatment, and once the cut-points are known, behavior bunches just on the favorable side of them — the notch effect familiar from tax and benefit thresholds.
This sourceTax-and-transfer notches create discontinuities at cutoffs and produce excess bunching on the favorable side of the threshold.
- Its characteristic failure is the cliff at the boundary: two nearly-identical cases straddling a cut-point receive sharply different treatment, and once the cut-points are known, behavior bunches just on the favorable side of them — the notch effect familiar from tax and benefit thresholds.
- Stratum-Specific Threshold Schedule
- Its failure mode is the cliff itself: any hard threshold creates a notch effect, where a case just over the line is treated very differently from one just under it, which both harms borderline cases and invites gaming right at the boundary.
This sourceShows that a discontinuous threshold creates sharply different treatment across the cutoff, dominated outcomes just above it, and strong incentives to bunch on the favorable side.
- Its failure mode is the cliff itself: any hard threshold creates a notch effect, where a case just over the line is treated very differently from one just under it, which both harms borderline cases and invites gaming right at the boundary.
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