Defining governance matters: A factor analytic assessment of governance institutions

This paper produces a new set of governance indices that enable estimation of the marginal economic benefits of particular categories of governance. The indices are constructed using a factor model, estimated on forty perceptions-based governance variables from eleven data sources. In contrast to previous research, a unified statistical framework is used to determine the number of governance indices to create, the conceptual content of each index, and the relative importance each has in accounting for the observable data. The four indices are labeled market infrastructure, downside governance risk, order, and civil liberties. Confidence intervals are calculated for each country, for each index to aid in the comparison of scores. As an application, the indices are used as explanatory variables in cross-country income regressions. Instrumental variables estimates show that market infrastructure and civil liberties both exert statistically and economically significant effects on per capita income, controlling for geography (malaria risk) and international trade.