Center for Effective Global Action

Research in development, labor, and health economics increasingly relies on indices to summarize the complex dimensions of human well-being—such as health, wealth, aspirations, and social inclusion—into single measures. Yet too often index construction is often driven by convention and precedent rather than by a clear conceptual framework, leaving little guidance on selecting the appropriate type of index for a given context, the data used to construct it, or the variables included. This paper provides a guide to index construction in applied microeconomics. It categorizes different index types and their appropriate uses, clarifies the tradeoffs between measurement and statistical power, and offers a decision tree to guide selection among approaches such as factor analysis, principal components, and aggregation-based indices. The paper also outlines principles for variable selection via machine learning in high dimensional settings and concludes with an example of index construction in a three country randomized trial with an entrepreneurial aspirations intervention. By linking conceptual foundations to applied practice, the paper aims to improve the transparency and rigor of index-based measurement in applied research.