Economic Freedom and Growth Across German Districts

Journal of Institutional Economics, 14(4): 739-765, 2018

Posted: 18 Jun 2019

See all articles by Rok Spruk

Rok Spruk

University of Ljubljana - Faculty of Economics

Aleksandar Keseljevic

University of Ljubljana - Faculty of Economics

Date Written: August 1, 2018

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 and Keseljevic, Aleksandar, Economic Freedom and Growth Across German Districts (August 1, 2018). Journal of Institutional Economics, 14(4): 739-765, 2018. Available at SSRN: https://ssrn.com/abstract=3401796

Rok Spruk (Contact Author)

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

Aleksandar Keseljevic

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

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