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Boris Nikolaev

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.