Economic Freedom and Life Satisfaction: Mediation by Income per Capita and Generalized Trust

Abstract

Several researches have shown that economic freedom is positively related to life satisfaction. Only a few studies, however, have examined which aspects of economic freedom (small government size, quality of the legal system, sound money, trade openness or no regulation) drive this relationship. Furthermore, most studies construe the influence of economic freedom as additional to the influence of income per capita on life satisfaction. No research has studied the potential mediating role of income per capita or other mediators in the relationship between economic freedom and life satisfaction. In order to fill these gaps, this paper aims (1) to investigate which aspects of economic freedom are most related to life satisfaction, and (2) to test whether these relationships are mediated by income and trust. Based on a sample of 120 countries, we find that life satisfaction is positively related to the quality of the legal system and negatively related to small government size. Income per capita mediates the positive influence of the quality of the legal system on life satisfaction. Trust is found to mediate the positive influence of the quality of legal system and the negative influence of small government size on life satisfaction, but the significance of these indirect effects depends on the type of economic freedom indicators used. We find no significant direct effects from the economic freedom indicators on life satisfaction.