Happiness and economic freedom: Are they related?

Abstract

In this article we investigate the linkage between economic freedom and happiness (subjective well-being). We attempt to understand which economic institutions (rule of law, limited government, regulatory efficiency, open markets) have influence on subjective well-being. For this purpose we use a panel dataset and analyze the effect of economic freedom on subjective well-being while using various control variables such as government expenditures as percentage of GDP, human development, social support, freedom of choice and generosity. Our pooled FGLS estimations indicate that all pillars of economic freedom have a strong influence on the average subjective well-being in society. Three of these pillars, namely rule of law, regulatory efficiency and open markets, positively affect subjective well-being. To our surprise we have found a negative relationship between limited government and subjective wellbeing. This might be due to the situation that reducing the size of government possibly leads to lower government expenditures and higher unemployment, which in turn results in lower subjective well-being.