Diffuse Bunching with Frictions: Theory and Estimation

Santosh Anagol, Allan Davids, Benjamin Lockwood and Tarun Ramadorai

No 17612, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We incorporate a model of frictions into the bunching-based elasticity estimator to rationalize diffuse bunching around kinks and mass above notches in empirical distributions. Model agents draw a sparse set of opportunities from a Poisson process, approximating a broad class of frictions including search costs, inattention, and lumpy adjustment; the predicted density depends on the standard structural elasticity and a money-metric “lumpiness parameter.†We estimate the model using administrative tax data on South African small-businesses, recovering moderate elasticities of taxable income between 0.2 and 0.3 at higher incomes, and larger elasticities at low incomes. Firms appear to treat the bottom kink as a notch, and firms with paid tax practitioners exhibit sharper bunching, driven primarily by lower frictions rather than a higher elasticity.

Keywords: Elasticity of taxable income; Tax; Sparsity; South Africa; Lumpy adjustment; Diffuse bunching; Optimization frictions; Small business (search for similar items in EconPapers)
JEL-codes: D22 H20 H25 H30 O55 (search for similar items in EconPapers)
Date: 2022-10
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Working Paper: Diffuse Bunching with Frictions: Theory and Estimation (2024)
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