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Socioeconomic Status Measurement With Discrete Proxy Variables: Is Principal Component Analysis A Reliable Answer?

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Author Info
Stanislav Kolenikov
Gustavo Angeles

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Abstract

The last several years have seen a growth in the number of publications in economics that use principal component analysis (PCA) in the area of welfare studies. This paper explores the ways discrete data can be incorporated into PCA. The effects of discreteness of the observed variables on the PCA are reviewed. The statistical properties of the popular Filmer and Pritchett (2001) procedure are analyzed. The concepts of polychoric and polyserial correlations are introduced with appropriate references to the existing literature demonstrating their statistical properties. A large simulation study is carried out to compare various implementations of discrete data PCA. The simulation results show that the currently used method of running PCA on a set of dummy variables as proposed by Filmer and Pritchett (2001) can be improved upon by using procedures appropriate for discrete data, such as retaining the ordinal variables without breaking them into a set of dummy variables or using polychoric correlations. An empirical example using Bangladesh 2000 Demographic and Health Survey data helps in explaining the differences between procedures. Copyright 2009 The Authors. Journal compilation 2009 International Association for Research in Income and Wealth Published by Blackwell Publishing.

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File URL: http://www.blackwell-synergy.com/links/doi/10.1111/j.1475-4991.2008.00309.x/enhancedabs
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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Income and Wealth.

Volume (Year): 55 (2009)
Issue (Month): 1 (03)
Pages: 128-165
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Handle: RePEc:bla:revinw:v:55:y:2009:i:1:p:128-165

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  1. Boris Branisa & Stephan Klasen & Maria Ziegler, 2009. "New Measures of Gender Inequality: The Social Institutions and Gender Index (SIGI)and its Subindices," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 10, Courant Research Centre PEG. [Downloadable!]
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This page was last updated on 2009-10-26.


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