Abstract. In this article we investigate the linkage between economic freedom and happiness (subjective well-being). We attempt to understand which economic institutions (rule of law, limited government, regulatory efficiency, open markets) have influence on subjective well-being. For this purpose we use a panel dataset and analyze the effect of economic freedom on subjective well-being while using various control variables such as government expenditures as percentage of GDP, human development, social support, freedom of choice and generosity. Our pooled FGLS estimations indicate that all pillars of economic freedom have a strong influence on the average subjective well-being in society. Three of these pillars, namely rule of law, regulatory efficiency and open markets, positively affect subjective well-being. To our surprise we have found a negative relationship between limited government and subjective wellbeing. This might be due to the situation that reducing the size of government possibly leads to lower government expenditures and higher unemployment, which in turn results in lower subjective well-being.

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In this paper we attempted to analyze the determinants of country level human development. Since the human development index is a better indicator of people's well-being than GDP per capita we argue that effectiveness of government policies should be judged in terms of their contribution to human development. By using a large panel dataset obtained from various sources we analyzed the effects of government expenditures and the level of economic freedom on human development. The results provide strong support for the hypothesis that higher level of economic freedom is positively related to higher level of human development. Economic freedoms are especially important in countries with low level of human development. On the other hand, we failed to find evidence for government expenditures' effect on human development. Overall, our results indicate that a country's institutional framework, especially those that are related to economic freedoms, have a significant effect on people's well-being and development.

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This study examines the relationship between income inequality and economic freedom by using two concepts developed in institutional economics, namely “extractive and inclusive institutions”. We argue that income inequality might be high both in countries with extractive institutions, where the level of economic freedom is low, and in countries with inclusive institutions, where the level of economic freedom is high. We propose a U-shaped relationship between income inequality and economic freedom. We use a panel data set containing 1425 country-year observations from 137 countries for the years from 2000 to 2018 to test our proposition. The results confirm our expectation that the relationship between income inequality and economic freedom is negative at low levels of economic freedom, but positive at high levels of economic freedom.