Development index: analysis of the basic instrument of Croatian regional policy ANA PERIŠIĆ, mag. math.* VANJA WAGNER, mag. math.* Preliminary communication** JEL: R1, C18, C43 doi: 10.3326/fintp.39.2.4 * The authors would like to thank Dubravka Šišak Jung, PhD as well as to two anonymous referees for their useful comments and suggestions. ** Received: June 1, 2014 Accepted: November 21, 2014 The article was submitted for the 2014 annual award of the Prof. Dr. Marijan Hanžeković Prize. Ana PERIŠIĆ Polytechnic of Šibenik, Trg Andrije Hebranga 11, 22000 Šibenik, Croatia e-mail:
[email protected] Vanja WAGNER University of Zagreb, Faculty of Science, Department of Mathematics, Bijenička cesta 30, 10000 Zagreb, Croatia e-mail:
[email protected] Abstract 206 The development level assessment and categorization of Croatian local and re- gional units is based on the value of the development index which is the main in- strument of Croatian regional policy. The development index is a composite indi- cator calculated as a weighted average of five socio-economic indicators. The 39 (2) 205-236 (2015) practice financial goal of this paper is to analyze the uncertainty and sensitivity of the development index that arise from the procedures and indicators used in its construction. This theory analysis is then used to propose useful guidelines for future impovements. The methodology of the Croatian regional development index has been critically re- and viewed, revealing problems of multicollinearity and the existence of outliers. An empirical and relatively more objective multivariate approach for weight selec- tion has been proposed. The uncertainty and sensitivity analysis were conducted using Monte Carlo simulations and variance-based techniques.