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Measuring Governance: Why do errors matter?

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  • Leandro M. Magnusson

    (Business School, The University of Western Australia)

  • Yashar Tarverdi

    (Bankwest Curtin Economics Centre, Curtin Business School, Curtin University)

Abstract

The World Governance Indicators (WGI) are well-known proxies for institutions and widely used in many studies across different disciplines. Each of the six WGI are constructed by aggregating several baseline indicators using the Multiple Indicators Multiple Cause (MIMC) method. This method assumes that the errors associated to the baseline indicators are independent. Here, we extend the MIMC method by allowing cluster dependence among those errors. The differences between the original and re-estimates of the WGI are statistically significant. We compare the results of three highly cited papers to illustrate that the new indices can alter their conclusions.

Suggested Citation

  • Leandro M. Magnusson & Yashar Tarverdi, 2018. "Measuring Governance: Why do errors matter?," Economics Discussion / Working Papers 18-10, The University of Western Australia, Department of Economics.
    • Handle: RePEc:uwa:wpaper:18-10
    Note: MD5 = b4185e8d3b35d52e5447e15bd2c4bb3f
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    Cited by:

    1. Focacci, Chiara Natalie & Kovac, Mitja & Spruk, Rok, 2023. "Ethnolinguistic diversity, quality of local public institutions, and firm-level innovation," International Review of Law and Economics, Elsevier, vol. 75(C).
    2. Chiara Natalie Focacci & Mitja Kovac & Rok Spruk, 2022. "The perils of Kremlin's influence: evidence from Ukraine," Papers 2206.04950, arXiv.org.

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    More about this item

    Keywords

    Governance Indicators; Measurement Error; MIMC; 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 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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