The convergence dynamics of economic freedom across U.S. states

Abstract

This study tests for convergence in economic freedom across the 50 U.S. states from 1981 to 2019. In particular, we test for stochastic convergence in overall economic freedom using unit root tests that account for structural breaks and bounded processes, two sources of parameter instability. We find limited evidence of stochastic convergence. Further analysis of relative (club) convergence and weak σ‐convergence rejects the presence of overall convergence in the panel of the U.S. states, but the emergence of two convergence clubs with respect to state‐level economic freedom. The logit analysis of the determinants of the convergence clubs reveals that more prosperous states and states with a higher initial level of economic freedom have a higher probability of being in the club with more economic freedom. However, more racially diverse states have a lower probability of being in the club with more economic freedom.

Stochastic convergence analysis of US state economic freedom sub‐components: Evidence from unit root tests for bounded processes

“…In light of the research to date, this study extends the economic freedom convergence literature to the three sub‐components of the overall economic freedom index at the US state level. Our study parallels aspects of the Payne et al (2023) study in the use of unit root tests with structural breaks and bounded processes to test for stochastic convergence in the case of the three sub‐components of economic freedom: government spending, taxation, and labor market freedom. We then compare our results with those of Payne et al (2023) regarding similarities and differences.…”

“…Following Payne et al (2023), a concern with testing for unit roots in this context is that the sub‐components of economic freedom indices are bounded time series with lower and upper bounds (Granger, 2010; Stansel et al, 2021). Cavaliere (2005) suggests that with the presence of lower and upper bounds, there is more bias toward rejecting the null hypothesis of a unit root if one fails to incorporate the bounds in the testing procedure.…”

“…Economic freedom is often considered a measure of institutional quality and a key component to fostering economic growth as noted in the surveys by Hall and Lawson (2014) and Lawson et al (2020)—also see Gwartney et al (1999). Along these lines, studies by Sobel and Coyne (2011), Elert and Halvarsson (2012), Heckelman (2015), Hall (2016), Savoia and Sen (2016), and Kallioras et al (2017) investigate the convergence behavior of economic freedom across countries, while Naghshpour and Nissan (2018) and Payne et al (2023) examine the convergence behavior of economic freedom at the subnational level in their analysis of economic freedom across US states.…”

“…More specifically, Naghshpour and Nissan (2018) present mixed results with respect to the convergence behavior of economic freedom at the US state and regional level using cross‐section absolute β‐convergence and two‐way analysis of variance. In a more recent study, Payne et al (2023) test for stochastic convergence using unit root tests for bounded processes with structural breaks and explore the possibility of convergence clubs among US states. Payne et al (2023) provide limited support for stochastic convergence, but identify two convergence clubs for economic freedom at the US state level.…”

“…In a more recent study, Payne et al (2023) test for stochastic convergence using unit root tests for bounded processes with structural breaks and explore the possibility of convergence clubs among US states. Payne et al (2023) provide limited support for stochastic convergence, but identify two convergence clubs for economic freedom at the US state level.…”