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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Firstly, to implement the RDD method effectively, one must understand that RDD capitalizes on a predetermined cutoff point to distinguish between the treatment and control groups. In the context of performance bonuses affecting employee productivity, the assignment variable could be the performance score or rating of employees, with the cutoff point being the minimum score required to receive a bonus.
"For clarity, let's define the assignment variable as the annual performance score of employees, ranging from 1 to 10. The firm decides that employees with a score of 7 or higher qualify for the performance bonus, making 7 the cutoff point. This cutoff allows for a natural division of employees into those receiving the treatment (the bonus) and those who do not."...
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