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Economic freedom and growth across German districts

Published online by Cambridge University Press:  25 September 2017

ROK SPRUK  and
ALEKSANDAR KEŠELJEVIĆ
ROK SPRUK*
Affiliation:
Faculty of Economics, University of Ljubljana, Laibach, Slovenia
ALEKSANDAR KEŠELJEVIĆ*
Affiliation:
Faculty of Economics, University of Ljubljana, Laibach, Slovenia
*
*Email: [email protected]
**Email: [email protected]
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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.

Type
Research Article
Information
Journal of Institutional Economics , Volume 14 , Issue 4 , August 2018 , pp. 739 - 765
Copyright
Copyright © Millennium Economics Ltd 2017 

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