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

There is a substantial literature estimating the effect of economic freedom on economic growth. Most studies examine the relationship between freedom and growth 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{growth 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 GSP that affects non-spatial estimates of the freedom{growth relationship. Taking into account the direct and indirect effects of economic freedom on GSP, we find a 10 percent increase in economic freedom is associated with a 4.2 percent increase in GSP.