Measuring Inequality of Opportunity with Latent Variables

19 Pages Posted: 6 Oct 2012 Last revised: 15 Aug 2013

See all articles by Florian Chávez-Juárez

Florian Chávez-Juárez

Centro de Investigacion y Docencia Economicas

Date Written: August 14, 2013

Abstract

In this paper I show that recently proposed methods to quantify the level of inequality of opportunity are likely to be downward biased when the dependent variable is a proxy for an unobserved concept. Using a multidimensional framework of development, such as the capability approach, or a standard utility maximization framework with heterogeneous preferences permits us to show that such measurement errors are the rule rather than the exception. I propose to estimate the latent variable of interest through appropriate multivariate techniques to circumvent the aforementioned bias. Using a simulation and an empirical illustration, I show that the use of multiple indicator variables and appropriate aggregation techniques can reduce the bias substantially. Using data from Mexico, it is found that inequality of opportunity of the broader concept of economic well-being is more than twice as high as inequality of opportunity in log income, which is commonly used as a proxy of the first.

Keywords: inequality of opportunity, multidimensional development, proxy measurement error, capability approach

JEL Classification: C18, D63, O54

Suggested Citation

Wendelspiess Chávez Juárez, Florian, Measuring Inequality of Opportunity with Latent Variables (August 14, 2013). Available at SSRN: https://ssrn.com/abstract=2156287 or http://dx.doi.org/10.2139/ssrn.2156287

Florian Wendelspiess Chávez Juárez (Contact Author)

Centro de Investigacion y Docencia Economicas ( email )

Carretera Mexico-Toluca 3655
Lomas de Santa Fe
Mexico City, 01210
Mexico

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