Thursday, 5 November 2015

Exit and reform

Countries from which it is easier to exit saw stronger improvement in economic freedom: voting with your feet matters. Here's Josh Hall's abstract:
There is a small but growing literature on the determinants of economic freedom. In this paper I contribute to this literature in two ways. First, I empirically show that β-convergence in economic freedom occurred from 1980 to 2010. Countries with low levels of economic freedom in 1980 “catch up” at a rate of 0.7 percent a year on average, ceteris paribus. Second, I document the structural characteristics that contribute to this institutional convergence. My conditional convergence estimates suggest democratic institutions do not contribute to conditional convergence. Exitability, a variable that captures how easy it is for citizens to “vote with their feet” is related to the change in economic freedom from 1980 to 2010 in a statistically significant manner across all specifications. This provides some to the importance of “exit” versus “voice” with respect to the question of institutional change. 
This will be a weak force among relatively free countries: libertarians don't seem to vote with their feet, and only those with strong preferences will much notice the differences within the top tier.

But policy pressure caused by threat of exit by your more productive citizens can induce better performance in weaker countries.

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