Index-Building in a System of Interdependent Variables: The Penalty for Bottleneck

26 Pages Posted: 17 Oct 2011 Last revised: 8 Nov 2011

See all articles by Zoltan J. Acs

Zoltan J. Acs

Schar School of Policy and Government

Gábor Rappai

University of Pecs

László Szerb

University of Pécs

Date Written: October 17, 2011

Abstract

While the importance and the popularity of indices able to capture complex categories and the multidimensional nature of a particular phenomenon have been increasing, most approaches are still not able to provide plausible policy recommendations. The Penalty for Bottleneck (PFB) methodology is based on the assumption that the performance of the system depends on the weakest link, i.e., the variable that has the lowest value. This approach deviates from the most frequently applied method of calculating the arithmetic averages of the variables, which explicitly assumes perfect substitutability and, hence, provides potentially false policy implications. The resulting PFB-based policy recommendation is clear: the bottleneck should be improved first because it has a magnifying effect on the other indicators in the system. The PFB methodology is applied to the Heritage Foundation Index of Economic Freedom data. We show how the original methodology and the PFB methodology differ from each other by using a conservative logarithmic penalty function.

Suggested Citation

Acs, Zoltan J. and Rappai, Gábor and Szerb, Laszlo, Index-Building in a System of Interdependent Variables: The Penalty for Bottleneck (October 17, 2011). GMU School of Public Policy Research Paper No. 2011-24. Available at SSRN: https://ssrn.com/abstract=1945346 or http://dx.doi.org/10.2139/ssrn.1945346

Zoltan J. Acs (Contact Author)

Schar School of Policy and Government ( email )

Founders Hall
3351 Fairfax Dr.
Arlington, VA 22201
United States
703-993-1780 (Phone)

HOME PAGE: http://home.ubalt.edu/zacs

Gábor Rappai

University of Pecs ( email )

Rakoczi 80
Pecs, 7622
Hungary

Laszlo Szerb

University of Pécs ( email )

Rákóczi st. 80
Pécs, 7622
Hungary

HOME PAGE: http://ktk.pte.hu/en/department-quantitative-management/laszlo-szerb

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