Explain the use of Regression Discontinuity Design (RDD) in evaluating the impact of performance bonuses on employee productivity.

Instruction: Describe how you would set up a Regression Discontinuity Design to assess whether introducing performance-based bonuses has a causal effect on employee productivity. Include considerations for determining the cutoff point, handling the assignment variable, and potential limitations of the RDD approach.

Context: This question assesses the candidate's knowledge of Regression Discontinuity Design as a method for causal inference, particularly in scenarios where a clear cutoff can be used to distinguish between treatment and control groups. Candidates should discuss how to effectively implement RDD, challenges in choosing and justifying the cutoff, and how to interpret results from an RDD analysis, considering its assumptions and limitations.

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Use an actual preexisting assignment rule: for example, a bonus is awarded when a sufficiently fine-grained pre-bonus performance score reaches 70. The outcome must be subsequent productivity, not the same score used to assign the bonus. Do not search for a cutoff that produces a favorable result.

For a sharp design, compare limiting outcome means just above and below the cutoff...

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