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On the (Mis)Use of Composite Indices: with Applications in Political Economy

Author

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  • Millimet, Daniel

    (Southern Methodist University)

  • Paloyo, Alfredo

    (University of Wollongong)

Abstract

Empirical researchers often replace latent constructs with composite indices, treating this as a neutral data-processing step. We prove this is a consequential identification choice. Our (near) impossibility theorem demonstrates that no linear index can guarantee consistent estimates of all parameters in multiple regressions. We show that proxy indices induce residual confounding, while popular weighting schemes introduce nonclassical measurement error with method-dependent biases. Using simulations and 2024 U.S. election data, we reveal that substantive conclusions are often artifacts of the chosen index. We argue that measurement models require the same formal scrutiny as other identification strategies.

Suggested Citation

  • Millimet, Daniel & Paloyo, Alfredo, 2026. "On the (Mis)Use of Composite Indices: with Applications in Political Economy," IZA Discussion Papers 18454, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp18454
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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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