Introduction

Solutions

Regression Discontinuity Design

Joseph T. Halford

University of Wisconsin Milwaukee

November 2, 2014

Joseph T. Halford Regression Discontinuity Design

 Introduction
Solutions

Introduction

These slides draw heavily from Roberts and Whited (2012)

Another quasi-experimental method to deal with endogeneity
RDD takes advantage of a known cutoff or threshold
determining treatment assignment
e.g. proxy voting, covenant violations, etc.
Intuition: The unobservable characteristics of firms that are
just above the threshold are similar to those that are just
below the threshold
The agent/firm must not be able to precisely control the
assignment variable near the cut off
Thus, near the cut-off firms are as good as randomly assigned
to control and treatment groups

Joseph T. Halford Regression Discontinuity Design

 Introduction
Solutions

Sharp RDD

Subjects are assigned to or selected for treatment solely on

the basis of a cutoff value of an observed variable
Several names for this variable: assignment, forcing, selection,
running, and ratings
Can be a single variable or a function of several variables
Key assumptions for Sharp RDD
1 Deterministic decision rule
2 Local continuous potential outcomes
Both conditions must be met for identification

Joseph T. Halford Regression Discontinuity Design

 Introduction
Solutions

Assumption 1: Deterministic Decision Rule

Assignment to treatment occurs through a known and

measured deterministic decision rule

1 if x ≥ x 0

d = d(x)
0 otherwise

Joseph T. Halford Regression Discontinuity Design

 Introduction
Solutions

Assumption 2: Local Continuous Potential Outcomes

Both potential outcomes, E (y (0)|x) and E (y (1)|x), are
continuous in x at x 0 . Equivalently, E (u|x) is continuous in x
at x 0

y = α + βd + u (1)
local continuity implies that the limits of the conditional
expectation function recover the ATE at x 0

lim E (y |x) − lim0 E (y |x) =

x↓x 0 x↑x

[ lim0 E (βd|x) + lim0 E (u|x)] − [ lim0 E (βd|x) + lim0 E (u|x)]

x↓x x↓x x↑x x↑x

= β (2)

Continuity implies lim0 E (u|x) − lim0 E (u|x) = 0

x↓x x↑x

Joseph T. Halford Regression Discontinuity Design

 Introduction
Solutions

Assumption 2: Local Continuous Potential Outcomes

Continuity ensures that the only difference between potential

outcomes close to x 0 is due to treatment

This may only work for a small group of observations close to

x 0 especially in the case of heterogeneous treatment effects
One must be careful of coincidental confounding forces that
induce the discontinuity
Joseph T. Halford Regression Discontinuity Design
 Introduction
Solutions

Main Assumptions for Fuzzy RDD

1 Assignment to treatment occurs in a stochastic manner where
the probability of treatment ( a.k.a. propensity score) has
known discontinuity at x 0
2 Local continuity of potential outcomes around x 0
In a fuzzy RDD one would not want to compare the average
outcomes of treatment and control groups, even those close
the threshold
In fuzzy RDD subjects may self-select around the threshold
and thus be different with respect to unobservables
You can think of fuzzy RDD as Sharp RDD where some
observations are mis-assigned. This mis-assignment could be
due to unobservable variables.

Joseph T. Halford Regression Discontinuity Design

 Introduction
Solutions

Assuming local continuity in potential outcomes

lim E (y |x) − lim0 E (y |x) =

x↓x 0 x↑x

[ lim0 E (βd|x) + lim0 E (u|x)] − [ lim0 E (βd|x) + lim0 E (u|x)]

x↓x x↓x x↑x x↑x

= β[ lim0 E (d|x) − lim0 E (d|x)] (3)

x↓x x↑x

lim E (y |x) − lim0 E (y |x)

x↓x 0 x↑x
β= (4)
lim0 E (d|x) − lim0 E (d|x)
x↓x x↑x

In Sharp RDD (eq. (2)) the denominator is equal to 1

Joseph T. Halford Regression Discontinuity Design

 Introduction
Solutions

Heterogeneous treatment effects

When the treatment effect is not constant, β̃

1 E (β̃|x) is locally continuous at the threshold, as before.
2 Require d to be independent of β̃ conditional on x near x 0
then,

lim E (y |x) − lim0 E (y |x)

x↓x 0 x↑x
E (β̃|x) = (5)
lim0 E (d|x) − lim0 E (d|x)
x↓x x↑x

Item 2 is usually violated, subjects self-select into treatment

when it is beneficial
May be able to identify LATE with additional assumptions
1 (β, d(x)) is jointly independent of x near x 0
2 The likelihood of treatment is always weakly greater above the
threshold than below

Joseph T. Halford Regression Discontinuity Design

 Introduction
Solutions

Local Average Treatment Effect

Given the prior additional assumptions equation (4) is the

LATE
LATE is the average treatment effect on compliers, those
subjects who would switch from non-recipient to recipient if
their score crossed x 0

Joseph T. Halford Regression Discontinuity Design

 Introduction
Solutions

Estimation

Sharp RDD

yi = β b + f (xi − x 0 ) + bi (6)

a 0
yi = β + g (xi − x ) + ai (7)

The treatment effect is (β a − β b )

Use different bands around x 0 and different polynomials for f , g
Fuzzy RDD, 2SLS, T is an instrument for selection

yi = α + βdi + f (xi − x 0 ) + i (8)

0
di = δ + φTi + g (xi − x ) + wi (9)

STATA: Install package RD

Joseph T. Halford Regression Discontinuity Design