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Benefit or burden? Unraveling the effect of economic freedom on subjective well-being

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  • Gehring, Kai

Abstract

Does economic freedom increase the utility of an average citizen? Public choice theory in particular has emphasized the shortcomings of governments and voting processes, and the advantages of relying on markets and individual decision making. However, an increasing amount of people are refusing to accept classical measures like GDP as signs of improvements in welfare. Data on subjective well-being allow economists to test if economic freedom really does improve the overall quality of life. However, existing studies have either failed to control for necessary control variables or lacked theoretical foundation. This paper explains economic and psychological reasons why the influence of economic freedom reaches beyond material well-being. Empirical results from a panel of 86 countries over the 1990-2005 period suggest that economic freedom indeed has a positive effect on happiness. Specifically legal security and property rights, access to sound money, and freedom from excessive regulation are significantly positive throughout the analysis. Regarding freedom to trade, the results show that particularly regulatory trade barriers have a significant negative effect. The positive effect depends on socio-demographic characteristics and is, on average, stronger for poorer countries and left-wing voters, and varies with age.

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  • Gehring, Kai, 2012. "Benefit or burden? Unraveling the effect of economic freedom on subjective well-being," Working Papers 0531, University of Heidelberg, Department of Economics.
    • Handle: RePEc:awi:wpaper:0531
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    Keywords

    economic freedom; happiness; life Satisfaction; government size;
    All these keywords.

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • D60 - Microeconomics - - Welfare Economics - - - General

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