A payroll-tax notch appears to suppress firm growth well beyond the threshold, and the paper proposes an estimator for the resulting bias in conventional designs.
Research question
How far do behavioral distortions from discrete policy notches extend, and how should their causal effects be estimated?
Method & data
A theoretical framework is paired with a new empirical method and an application to the abolition of a size-based payroll-tax notch.
Main finding
The abstract reports fewer firms above the threshold and lower scale among treated firms, while conventional difference-in-differences estimates imply much smaller effects.
Why it matters
Policy thresholds can create growth barriers whose effects are missed when standard estimators assume adjustment is localized near the cutoff.
What to verify
Institutional details, robustness checks, and the conditions required by the new estimator are not stated in the public abstract.
Show public abstract used for this summary
Discrete policy thresholds are pervasive in tax and regulatory systems and can substantially distort behavior. We show that notches acting as barriers to mobility within a distribution generate distortions extending far beyond the threshold. The same mechanism biases conventional difference-in-differences estimators, and we propose a new methodology to recover causal effects. Applying the method to the abolition of a size-based payroll tax notch, we find that the notch reduced the number of firms above the threshold by 18 percent and lowered treated firms’ employment, capital stock, and value added by 10 percent, whereas conventional difference-in-differences estimates imply negligible effects.