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Economic freedom and growth across German districts

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  • SPRUK, ROK
  • KEÅ ELJEVIĆ, ALEKSANDAR

Abstract

In this paper, we revisit the relationship between economic freedom and growth across 407 German districts (Kreise). We build six indicators of economic freedom and cluster them into categories reflecting tax rates and size of the government and public sector. Exploiting the variation in the constructed indices of economic freedom, the evidence suggests less indebted districts with a lower share of taxes and a relatively smaller public sector achieve consistently higher growth rates and income levels. The beneficial effect of economic freedom on growth is robust to the variety of specification checks and does not appear to be driven by sample selection. The evidence does not indicate a lower level of economic freedom in former East German districts or greater economic freedom in West German districts but unveils a persistent north–south divide in the post-unification period. In the counterfactual scenario, a transition to the 90th percentile of economic freedom is associated with large income and growth gains. Such a transition would yield higher income levels and growth rates with a notable decrease in regional economic inequality within Germany.

Suggested Citation

  • Spruk, Rok & Keå Eljeviä†, Aleksandar, 2018. "Economic freedom and growth across German districts," Journal of Institutional Economics, Cambridge University Press, vol. 14(4), pages 739-765, August.
    • Handle: RePEc:cup:jinsec:v:14:y:2018:i:04:p:739-765_00
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    Cited by:

    1. Gouider, Abdessalem & Nouira, Ridha & Saafi, Sami, 2022. "Re-Exploring the Nexus Between Economic Freedom and Growth: Is There a Threshold Effect?," Journal of Economic Development, The Economic Research Institute, Chung-Ang University, vol. 47(3), pages 147-167, September.
    2. Johan Graafland, 2020. "When Does Economic Freedom Promote Well Being? On the Moderating Role of Long-Term Orientation," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 149(1), pages 127-153, May.
    3. Cristian Barra & Nazzareno Ruggiero, 2023. "Institutional quality and public spending in Europe: A quantile regression approach," Economics and Politics, Wiley Blackwell, vol. 35(3), pages 949-1019, November.
    4. Johan Graafland & Harmen Verbruggen, 2022. "Free-Market, Perfect Market and Welfare State Perspectives on “Good” Markets: an Empirical Test," Applied Research in Quality of Life, Springer;International Society for Quality-of-Life Studies, vol. 17(2), pages 1113-1136, April.
    5. Graafland, Johan & de Jong, Eelke, 2022. "The moderating role of culture on the benefits of economic freedom: Cross-country analysis," Journal of Comparative Economics, Elsevier, vol. 50(1), pages 280-292.
    6. Olalekan C. Okunlola & Olumide A. Ayetigbo, 2022. "Economic Freedom and Human Development in ECOWAS: Does Political-Institutional Strength Play a Role?," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(3), pages 1751-1785, September.

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