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Estimating Capabilities with Structural Equation Models: How Well are We Doing in a ‘Real’ World?

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  • Jaya Krishnakumar

    (University of Geneva)

  • Florian Chávez-Juárez

    (Centro de Investigación y Docencia Económicas (CIDE))

Abstract

Measuring capabilities is a major challenge for the operationalization of the capability approach. Structural equation models (SEM) are being increasingly used as one possible methodology for estimating capabilities, but a certain skepticism remains about their appropriateness. In this paper, we perform a unique simulation experiment for testing the validity of such estimators. Using an agent-based modeling tool, we simulate a ‘real’ life scenario with individuals of heterogeneous characteristics and behaviors, having different capability sets, and making different decisions. We then run a SEM (MIMIC) model on the data generated in this simulated world to estimate the individual capabilities. Thus our data generating process is completely disconnected with the econometric model used for estimation. Our results support the idea that SEM can coherently estimate the true capabilities. We find that the linear predictor from the structural part of the SEM provides better results than the ‘classical’ factor scores based on the full model.

Suggested Citation

  • Jaya Krishnakumar & Florian Chávez-Juárez, 2016. "Estimating Capabilities with Structural Equation Models: How Well are We Doing in a ‘Real’ World?," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 129(2), pages 717-737, November.
    • Handle: RePEc:spr:soinre:v:129:y:2016:i:2:d:10.1007_s11205-015-1148-6
    DOI: 10.1007/s11205-015-1148-6
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    References listed on IDEAS

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    More about this item

    Keywords

    Latent variables; MIMIC; SEM; Simulation; Capability approach;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • I00 - Health, Education, and Welfare - - General - - - General
    • I20 - Health, Education, and Welfare - - Education - - - General

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