Public Choice

, Volume 141, Issue 1–2, pp 103–127 | Cite as

Does economic freedom cause prosperity? An IV approach

Article

Abstract

A positive, statistical and economic significant relation between growth, income level and the Economic Freedom of the World (EFW) index has been amply documented. Most analyses, however, use OLS methods which, in the presence of endogenous variables do not establish causality and produce biased and inconsistent estimates. This paper uncovers the exogenous component of EFW using IV methods and finds a robust channel from economic freedom to prosperity. The findings, including instrument validity tests, support the importance of policies and institutions for development and warrants policy advice aimed at increasing economic freedom to foster prosperity.

Keywords

Economic freedom Prosperity Policies Institutions Instrumental variables 

JEL Classification

O1 O43 

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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.IESA Poba International 646MiamiUSA

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