This study looks at the effect of institutional quality on new business activity and organized crime. Building on the work of Baumol on productive versus unproductive entrepreneurship, I consider criminal activity as a form of unproductive entrepreneurship. The empirical analysis utilizes unbalanced international panel data of up to 75 countries between 2002 and 2012. The empirical results suggest a positive relationship between institutional quality and new business formation and a negative relationship between institutional quality and criminal activity and rent seeking. I conclude the chapter by discussing the complexity of the relationship between different forms of entrepreneurship that must be considered in future studies investigating this issue.
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Tarkan Cavusoglu and Oguzhan Dincer
Using a panel of 48 contiguous American states over 15 years, we estimate the co-integrating relationship between economic freedom and entrepreneurial activity and find there is threshold level of development which determines if economic freedom increases entrepreneurial activity or not. According to our estimations economic freedom increases entrepreneurial activity in relatively poorer states. Our results have important policy implications. We do not find a statistically significant relationship between individual areas of economic freedom and entrepreneurial activity, indicating that decreasing the size of the government without decreasing its scope does not cause entrepreneurial activity to increase.
Steven B. Caudill, Daniel M. Gropper, Valentina Hartarska and Franklin G. Mixon
There have been numerous studies examining the relationship between economic freedom and economic growth. At the same time, there have been relatively few studies examining production or cost relationships for microfinance institutions, largely due to the lack of adequate data. The goal of this chapter is to combine these two strands of literature. In particular, we examine the impact of improvements in economic freedom on microfinance efficiency for microfinance institutions in Europe and Central Asia using a translog cost function. We find that increased microfinance efficiency is associated with improvements in economic freedom and that those countries experiencing large changes in economic freedom experience significant improvements in microfinance efficiency.
This chapter reviews the empirical literature on the relationship between economic freedom and subjective well-being. It also suggests some methodological problems with examining this relationship empirically. Evidence is presented that suggests that people who live in countries with institutions consistent with the principles of economic freedom report higher levels of subjective well-being. Economic freedom tends to benefit not only the top 20 percent of income earners but even more so those at the bottom of the income spectrum. The effect of economic freedom also tends to be much stronger in less developed countries. Decomposing the EFW index into its five areas further shows that what matters to subjective well-being is not the size of the government but the quality of the institutions that define the legal system and establish rules for the protection of private property, sound monetary policy, and friendly business environment.
Jac C. Heckelman
In this chapter, institutional quality, as proxied by the Heritage Index of Economic Freedom, is tested for sigma convergence and divergence across a sample of 97 countries covering the period 1995–2014. Divergence of the overall index value is found to be occurring, indicating governmental institutions and policies are becoming more dissimilar on the whole around the world. Testing each component separately, however, reveals that freedoms related to property rights, business, investment, and financial are globally diverging whereas freedoms related to corruption, fiscal, government, monetary, and trade are converging. Dividing the sample into five distinct regions, it is also found that countries within the Europe and Middle East/North Africa regions are converging for overall economic freedom. This suggests that European countries are adopting institutional structures and policies more similar to each other, as are MENA nations. In other words, European and MENA nations are forming an institutional convergence club.
Richard J. Cebula
This preliminary empirical study for the year 2010 analyses whether interstate differentials in economic freedom influence the state-level settlement pattern of undocumented immigrants in the U.S. This study also seeks to determine whether the number of sanctuary cities in a state may also have acted as an attraction for undocumented immigrants. In both estimates, the settlement pattern of the undocumented immigrant population appears to be an increasing function of the level of overall economic freedom in a state. The results in this study imply that a one unit higher value for the economic freedom index for a state would, ceteris paribus, be associated with a higher value for the relative size of the undocumented immigrant population in the state in the range of 28 to 33 percent. The evidence in the estimates provided here also indicates that undocumented immigrants are indeed attracted to states having more sanctuary cities.
Joshua C. Hall, Dean Stansel and Danko Tarabar
We synthesize and elaborate on the existing research concerning the role of the Economic Freedom of North America (EFNA) index. Our consensus after reading this literature is that the EFNA index is largely positively related with normatively good outcomes, and negatively related to normatively bad ones, with a few exceptions. The literature considers the EFNA index as a good proxy for institutional quality, regulatory environment, and business-related policies across North American states and provinces. In addition, a significant number of studies take interest in the EFNA as a variable to be explained by factors such as ideology, legal origins, and pro-market think tank spending. The literature on EFNA is still in its relative nascence, but is growing rapidly, and can provide a useful guide towards future policy changes leading into positive institutional transformations and hence better economic outcomes.
Richard M. Robinson
Four principles at the philosophical foundation of American authority also form the philosophical foundation for the most important social action in American culture, i.e. the actions associated with business formation, retrenchment and extension. After presenting these four principles, it is argued that managerial action in business is, or at least could be, a modern version of involvement in the ancient polis. The words and deeds that formed the paramount action in the polis in ancient Greece can now be interpreted as having a modern common-man’s corresponding action that results from the economic impetus to form organizations for the fabrication of goods and services. Management and skilled labor compose both the leaders and the fabricators who act through explicit and implicit contractual agreements to benefit both those organized and the general public.
Rajeev K. Goel, Michael A. Nelson and James E. Payne
This study extends the existing literature on the role of economic freedom on entrepreneurship by employing the Global Entrepreneurship and Development Index (GEDI). Unlike other indices/measures of entrepreneurship, the GEDI takes into account both individual and institutional factors that influences entrepreneurial performance within a country. Using a cross-section of 72 countries, we find that a country’s GDP and level of education each yield a positive and statistically significant impact on entrepreneurship. Surprisingly, both the level of democracy and the degree of trade openness did not yield a statistically significant impact on the level of entrepreneurship. While the overall level of economic freedom has a positive and statistically significant influence on entrepreneurship, the results for several components of economic freedom provided varying results. While size of government and monetary freedom are statistically insignificant, regulation renders a positive and statistically significant impact on entrepreneurship.
Daniel L. Bennett, Richard J. Cebula and Robert Boylan
In this exploratory eclectic study for the year 2005, we find that the nominal median new house price in any given state was an increasing function of the state’s per capita income, the net immigration rate, the average January temperature, and the degree of urbanization. In addition the evidence strongly suggests that the nominal median new house price in any given state was found to be a decreasing function of both the crime rate and labor market freedom. We believe there is good reason to argue that labor freedom has a significant impact on interstate home price differentials. Our findings suggest that for a one unit increase in labor freedom, ceteris paribus, there is a 23 percent decrease in the interstate home price differentials.