Do Good Institutions Make Citizens Happy, or Do Happy Citizens Build Better Institutions?

Recent empirical investigations show that ‘good institutions’, in the form of democracy and economic freedom, are related to elevated scores of subjective well-being across countries. Most of these studies automatically assume that causality runs from formal institutions to happiness. None the less, an inverse relationship is also feasible and only a few authors have specifically analyzed this possibility. Furthermore, not much is known about the individual aspects of institutions that are valued by citizens, and how these preferences might change with the level of economic development. This paper contributes to closing these gaps, conducting ordinary least squares- and instrumental variable analysis as an empirical strategy. Results show that citizens in developing countries value the procedural aspects of democracy, access to sound money, and free trade, while citizens in developed countries only seem to value a comparatively well-functioning legal system and higher security of property rights. Findings indicate the existence of a causal channel from economic freedom to well-being, but can’t exclude a long run effect of intrinsic happiness on economic freedom through social capital. Copyright Springer Science+Business Media Dordrecht 2013