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Measuring governance: Why do errors matter?

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  • Magnusson, Leandro M.
  • Tarverdi, Yashar

Abstract

The Worldwide Governance Indicators (WGI) are well-known proxies for institutions and are widely used in many studies across different disciplines. Each of the six WGI is constructed by aggregating several baseline indicators that reflect information about a single latent variable. The method used, however, assumes that the errors associated with the baseline indicators are independent. Here, we extend this method by allowing cluster dependence among those errors. The differences between the original and new estimates of the WGI are statistically significant. We compare the results of two highly cited papers with the ones obtained from our method to illustrate that the new indices can alter their conclusions.

Suggested Citation

  • Magnusson, Leandro M. & Tarverdi, Yashar, 2020. "Measuring governance: Why do errors matter?," World Development, Elsevier, vol. 136(C).
  • Handle: RePEc:eee:wdevel:v:136:y:2020:i:c:s0305750x2030187x
    DOI: 10.1016/j.worlddev.2020.105061
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    More about this item

    Keywords

    Governance indicators; Measurement error; Institutions;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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