What Are the Effects of Economic Freedom at the State Level?

A brand new paper from the Mission Foods Texas-Mexico Center at SMU:

In this paper, we examine the relationship between institutional quality and bilateral trade patterns between Mexican states and U.S. states. We are contributing to the small, but growing, literature which uses gravity models to examine economic exchange at the subnational level (see Havranek and Irsova 2017 for a recent review of this literature). We are the first to explicitly incorporate institutional quality into a model of trade between the U.S. states and Mexican states, and the first to examine these sorts of relationships between the U.S. and Mexican states more generally. Poor institutions can be viewed as a cost for potential trading partners, and economic theory tells us that when an action becomes more costly, less of that action will be undertaken. Conversely, when an action becomes less costly, more of that action will be undertaken. We find that states with better institutional environments as measured by the Economic Freedom of North America index do, indeed, realize higher levels of trade. We also contribute to the literature examining trade border effects (Hillberry and Hummels 2002; Chen 2004; Head and Ries 2001) by examining the impact the border has on trade between the U.S. states and Mexican states. Finally, we use our dataset to examine the relationship between trade volume and three measures of economic prosperity (pg. 6).

The authors lay out their key findings and policy recommendations:

Economic institutions matter.

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