Synthetic Regression Discontinuity: Estimating Treatment Effects using Machine Learning

2022-04-08 08:45 - 10:15

Speaker: Jörn Boehnke

Title: Synthetic Regression Discontinuity: Estimating Treatment Effects using Machine Learning

Abstract:  In the standard regression discontinuity setting, treatment assignment is based on whether a unit’s observable score (running variable) crosses a known threshold.  We propose a two-stage method to estimate the treatment effect when the score is unobservable to the econometrician while the treatment status is known for all units.  In the first stage, we use a statistical model to predict a unit’s treatment status based on a continuous synthetic score.  In the second stage, we apply a regression discontinuity design using the predicted synthetic score as the running variable to estimate the treatment effect on an outcome of interest.  We establish conditions under which the method identifies the local treatment effect for a unit at the threshold of the unobservable score, the same parameter that a standard regression discontinuity design with known score would identify. We also examine the properties of the estimator using simulations, and propose the use machine learning algorithms to achieve high prediction accuracy.  Finally, we apply the method to measure the effect of an investment grade rating on corporate bond prices by any of the three largest credit ratings agencies.  We find an average 1% increase in the prices of corporate bonds that received an investment grade as opposed to a non-investment grade rating.