Stochastic dominance spanning and augmenting the human development index with institutional quality

Abstract

The well-known Human Development Index (HDI) goes beyond a single measure of well-being as it is constructed as a composite index of achievements in education, income, and health dimensions. However, it is argued that the above dimensions do not reflect the overall well-being, and new indicators should be included in its construction. This paper uses stochastic dominance spanning to test the inclusion of additional institutional quality (governance) dimensions to the HDI, and we examine whether the augmentation of the original set of welfare dimensions by an additional component leads to distributional welfare gains or losses or neither. We find that differently constructed indicators of the same institutional quality measure produce different distributions of well-being.