Special Issue on "Institutions and wellbeing," part 2

Guest post by Toke Aidt, Daniel L. Bennett, and Boris Nikolaev

(This is the second part of a description of a recent special issue in the European Journal of Political Economy, continuing part 1)

While economic performance provides an indication of economic well-being, the concept of well-being is complex and pertains to a variety of quality of life indicators. Three of the papers in the Special Issue (SI) examine how institutions impact subjective well-being in transition economies. Milena Nikolova examines the role of macroeconomic performance and institutions in explaining the life satisfaction gap between transition (post-communist) and non-transition (advanced) economies in her paper, “Minding the Happiness Gap: Political Institutions and Perceived Quality of Life in Transition.” She finds that macroeconomic factors and the rule of law explain a significant portion of the happiness differential, and that improvements in the rule of law in transition economies nearly eliminated the gap. In their paper, “Tax Evasion and Well-Being: A Study of the Social and Institutional Context in Central and Eastern Europe”, Ada Ferrer-i-Carbonell and Klarita Gërxhani find evidence in survey data from 14 Central and Eastern European countries that tax evaders may be less satisfied with their lives, depending on how they perceive the institutions that govern tax collection and public spending. Zhiming Cheng, Stephen King, Russell Smyth, and Haining Wang, in their paper “Housing Property Rights and Subjective Well-Being in Urban China”, provide evidence that homeownership and property rights are important determinants of well-being in China.

Several other papers in the SI explore how institutions impact other dimensions of well-being. Niclas Berggren and Therese Nilsson explore how U.S. state-level economic freedom influences tolerance in their paper, “Tolerance in the United States: Does Economic Freedom Transform Racial, Religious, Political and Sexual Attitudes?” They find that greater economic freedom is associated with more tolerance towards three minority groups: atheists, communists and homosexuals. In their paper, “Want Freedom, Will Travel: Emigrant Self-Selection according to Institutional Quality”, Maryam Nejad and Andrew Young provide evidence using Poisson pseudo-maximum likelihood estimation that economic (but not political) freedom is a significant pull factor for potential migrants. Boris Nikolaev and Daniel Bennett provide evidence that people who live in countries with higher levels of economic freedom perceive greater control over their lives in their paper “Give Me Liberty and Give Me Control: Economic Freedom, Control Perceptions and the Paradox of Choice.” Finally, in their paper, “Aiding Economic Freedom: Exploring the Role of Political Institutions”, Nabamita Dutta and Claudia Williamson explore whether foreign aid can lead to institutional improvements. For a sample of 108 countries over the period 1971-2010, they find that foreign aid given to democracies may leader to greater economic freedom, but aid given to autocracies may have the opposite effect.

Overall, the papers in this SI highlight that institutions matter not only for objective quality of life indicators such as economic growth and unemployment that economists traditionally focus on, but also for a variety of subjective well-being measures such as life satisfaction or people’s perceptions about how much freedom of choice and control they have over their lives. Thus, these findings suggest an exciting new line of research that has the potential to connect the psychological and cultural mechanisms underlying the relationship between political and economic institutions and the broader concept of well-being.

Despite these findings and many other recent advancements in the new institutional economics literature, however, there are still important questions that remain to be answered. North himself pointed out many of these questions. What are the deep origins of formal institutions and what is their interplay with culture; how to best measure and model institutional dynamics; what is the direction of causality; and what are the underlying mechanisms through which institutions work are only few of these questions that are still intensely debated in the literature. Perhaps even more importantly, the recent introduction of Western style political institutions in Russia and Eastern Europe, as well as the astounding levels of economic growth in China despite little political reform, show that research in institutions is only scratching the surface of what could be one of the most insightful areas of inquiry to help us understand the dynamic between the macro-level institutional environment and micro-level individual behavior.

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