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Mean-Covariance Structure Models in Economic Research: an Application to a Lending Program for Development in Burkina Faso


  • Paxton, J.
  • Thraen, C.


As applied development economic models become more sophisticated, they include increasingly complex conceptual variables. Due to data collection limitations, accurate proxies and continuous variables are often unavailable. A Mean and Covariance Structure model (MECOSA) is offered as a useful methodology for the incorporation of latent variables with metric, censored metric, dichotomous and ordinal indicators. As an example, conceptual variables (including borrower homogeneity and the domino effect) presented in the Besley and Coate (1995) group lending repayment game were specified as latent variables with non-metric indicators. Data from 140 groups from a group lending program in Burkina Faso were used to demonstrate the application and interpretation of MECOSA.

Suggested Citation

  • Paxton, J. & Thraen, C., 2004. "Mean-Covariance Structure Models in Economic Research: an Application to a Lending Program for Development in Burkina Faso," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 1(2), pages 5-26.
  • Handle: RePEc:eaa:ijaeqs:v:1:y2004:i:1_7

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    mean and covariance structure models; latent variables; development finance; group lending;

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance


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