Economic Freedom, Capital, and Growth: Evidence from the States

Hall et al. (2010) develop a growth model where the allocation and productivity of human and physical capital depend on the quality of institutions in a country. We apply their model to the US states from 1980 to 2000. Using the Economic Freedom of North America as our measure of institutional quality, we find evidence that increases in human capital lead to increases in output per worker only in states with average EFNA scores above 5.91. Physical capital, unlike in the cross-country case, always has a positive effect on output per worker.