Multi-Dimensional Wellbeing Assessment: A General Method for Index Construction with an Application to Multivariate Deprivation Measurement

This paper explores some difficulties encountered in multi-dimensional measures of wellbeing. In particular, it highlights the need for such indices to (i) incorporate information on individual preferences, (ii) be robust with respect to estimation assumptions given the ‘curse of dimensionality’ problem, and (iii) reflect complementarities and substitutabilities between dimensions. The paper proposes a procedure that enhances the Alkire and Foster (2011) Multi-dimensional Deprivation Index (AFMDI), drawing on recent work in Anderson et al. (2011), which addresses these difficulties. The approach provides the requisite flexibility in the representation of wellbeing component deprivations, whilst admitting the possibility of sub-component substitutability/complementarity in the index, and retains the ability to measure the impact of improvements/worsenings of sub-components within each category. It then provides an application to the measurement and valuation of opportunity in different domains using a unique dataset for working age adults in the U.S.. Empirical findings suggest that freedoms are substitutable, that their values depend on an individual’s needs, and that complementarities if they exist are weak. Policy implications are briefly discussed. The paper then concludes that such indices are feasible to implement, and holds promise in economic applications ranging from measurement of progress in wellbeing, to the multi-dimensional assessment of poverty. JEL Code: I31, I32