Economic Freedom and Income Levels Across U.S. States: A Spatial Panel Data Analysis

Abstract

There is a large literature estimating the effect of economic freedom on economic growth or income levels. Most studies examine the relationship between economic freedom and growth or income levels for countries, while a few examine the relationship for U.S. states. Absent in the state-level literature is consideration of the presence of spatial spillovers affecting the freedom-income relationship. Neglecting to account for spatial autocorrelation can bias estimation results and therefore inferences drawn. We find evidence of a spatial pattern in real per-capita gross state product (GSP) that affects nonspatial estimates of the freedom-income relationship. Taking into account the direct and indirect effects of economic freedom on real per-capita GSP, we find a 10% increase in economic freedom is associated with a 5% increase in real per-capita GSP.

JEL Classification: E02, O47, R11