FUNDAMENTAL CAUSES:

CULTURE

UB Bachelor Degree in International Business

Academic Year 2020/2021

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 Plan

1. What is culture?

2. What is the interaction between culture and institutions?

3. Does culture affect economic development?

*This class is inspired by classes by James Fenske and Marc Pratt

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What is culture?

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 Definitions

Fernandez (2011) Does Culture Matter?: “systematic variation in beliefs and

preferences across time, space, or social groups.“

Guiso, Spienza and Zingales (2006) Does Culture Affect Economic Outcomes?:
“Those customary beliefs and values that ethnic, religious, and social groups
transmit fairly unchanged from generation to generation”

Nunn (2012) Culture and the historical process : “decision making heuristics
or `rules of thumb' that have evolved given our need to make decisions.“

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 How to Measure Culture?

Three typical approaches:

1. survey data

2. second-generation immigrants

3. experimental evidence.

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 Survey Data

Survey data is most common, especially aggregated to country level and

correlated with economic outcomes.

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 Second-generation Immigrants

Second-generation immigrants: behavior of immigrants in the same

destination country, typically in the United States.

Why immigrants? Constant institutional environment.

Why second generation? Second-generation immigrants used to overcome

selection in migration.

Can be used to measure culture in the country of origin.

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 Experimental Evidence

Experimental evidence: compares how individuals from different cultures

play trust, public good, or ultimatum games.

Critical concern is external validity.

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 Cultural Differences: Experimental Evidence?

Individuals from different cultures use different strategies in laboratory

games:

– Chuah, Homann, Jones, and Williams (2007): More “home country“ bias in the
ultimatum game in Malaysia than the UK.

– Henrich (2000) lower offers in the ultimatum game in the Amazon than in L.A., but a
higher acceptance rate.

But are these because of different attitudes? Oosterbeek, Sloof, and van de
Kuilen (2004) find no correlation between WVS attitudes and shares in the
ultimatum game.

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 Trust

Most studied trait: refers to people the respondent doesn't know.

“Generally speaking, would you say that most people can be trusted or that
you cant be too careful when dealing with others?"

Correlates with economic development, individual performance, financial

development, participation in the stock market, trade, productivity,
innovation ...

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Trust

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 Individualism versus collectivism

Possibly the main dimension of cultural difference across countries (Greif or

Gorodnichenko)

Individualism puts emphasis on personal achievements and individual rights,

expecting people to defend selves and family, and choose own affiliations.

In collectivistic societies people act mainly as members of cohesive lifelong

groups or organizations.

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Individualism

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 Family Ties

Baneld and Coleman both argue that societies based on strong family ties
promote good conduct within small circles but consider selfish behavior
acceptable outside this network.

Alesina and Giuliano (2010): “societies that rely too much on the family have
less generalized trust and lower civic sense.“

Other studies find family ties correlated with family capitalism, prevalence of
family businesses, nepotism in hiring, and small firms.

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Family Ties

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 Generalized Morality

“Generalised" vs "limited" morality (Tabellini, 2008)

Conceptually, the distinction concerns the scope of application of norms of

good conduct (whether towards everybody or just in a narrow group with
which the individual identifies).

Generalised morality means that individual values support a generalised

application of norms of good conduct in a society of abstract individuals
entitled to specific rights.

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Generalized Morality

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 Attitudes toward work and the perception of poverty

Relevance of hard work v. luck in determining success.

“Do you believe poors could become rich if they tried hard enough?”

Poverty viewed with less sympathy when correlated with racial differences,
particular when the poor are minorities.

Alesina and Glaeser (2004) argue these beliefs can explain much of the
difference in US and European welfare states.

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Work-Luck Beliefs

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Correlations Among Cultural Traits

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Culture and Institutions

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 Culture and Institutions

Based on Alesina and Giuliano 2015 “Culture and Institutions" Journal of

Economic Literature.

Two way causal relationship between culture and institutions.

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 Difference Between Culture and Institutions

Culture: those customary beliefs and values that ethnic, religious, and social
groups transmit fairly unchanged from generation to generation (Guiso,
Sapienza, and Zingales 2006).

Institutions: rules of the game, including customs, laws , and norms…

Overlap - norms and conventions are in both definitions

Possible solution from Alesina and Giuliano (2015)

• Only refer to formal institutions as institutions
• Refer to culture (values and beliefs) only as informal institutions.

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 A Famous Example: Greif (1994)
Greif (1994) “Cultural Beliefs and the Organization of Society: A Historical and
Theoretical Reflection on Collectivist and Individualist Societies», JPE.

Culture shapes institutions: he compares the Maghrebi traders of the 11th

century with Genoese traders of the 12th century.

Both groups faced similar environments and agency problems, but dealt with
them differently.

He creates a simple model in which traders hire agents. In an “individualist"

society, a trader hires any unemployed agent. In a “collectivist“ society, he
only hires an agent who has never cheated.

“Individualist" Genoa, then, had to develop formal codes and business

organizations. The “collectivist" Maghrebis did not.

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The interaction between culture and formal institutions
Recent contributions look at co-evolution of institutions and culture,
considering multiple equilibria.

Tabellini (2008) writes a model in which,

1. If there are many cooperative players, returns to cooperation rise and

parents teach their children cooperation.

2. Well-functioning legal institutions can facilitate this.

3. Cooperative players lead to less strain on the judicial system, improving

its functioning.

Ultimately, these interactions may explain economic growth.

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Does culture affect economic growth?

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 Weber’s Theory

Weber (1905) provided an ethics-based theory for economic development.

The Protestant Reformation was instrumental in facilitating industrial

capitalism in Western Europe.

The Protestant work ethic approved the accumulation of wealth and thus
provided the moral foundation for capitalist industrialization.

Although economic success was not seen as a means to please God , it

became regarded as a sign of being among the select group that God will
save from damnation.

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 Weber’s Debate

This theory is very famous and appealing but not very successfully tested in
reality.

Some works do not find this correlation between Protestantism and capitalist
development.

Others find this correlation but give a different explanation not connected
with ethics.

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 Change in Behaviours, but Not in Outcomes

Delacroix and Nielsen (2001) have compared countries of nineteenth-century Europe

to investigate the hypothetical associations between Protestantism and development
of industrial capitalism.

They find a significant relationship between Protestantism and savings bank deposits
per capita, and weaker evidence of an association between Protestantism and total
bank deposits per capita, supporting the idea of superior Protestant frugality.

This finding lends credence to one of the intermediate causal links of Weber’s theory:
the mechanism linking Protestantism with behavior, in this case frugality or
thriftiness.

However, the rest of the causal chain predicting favorable economic consequences of
frugality, in terms of greater wealth, is not supported.

They do not find the predicted relationships between percentage Protestants and
wealth per capita.

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 Not Ethics, but Literacy
Sandeberg (1979) studies human capital in Sweden before WWI.

Swedish human capital stocks were wildly disproportionate to income levels

around 1850, and still somewhat disproportionate in 1914.

Sanberg attributes this high human capital stock to the conversion of the
Swedish population to orthodox Lutheranism in the sixteenth century.

Because of their belief that every person should be able to read the Gospel for
himself, all Protestant sects encouraged literacy.

The movement permanently convinced the Scandinavian peasantry and much of

the clergy of the desirability, on non-economic grounds, of universal elementary
education.

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 Not Ethics, but Literacy: A Test

Becker and Woessmann (2009) provide an alternative theory, where

Protestant economies prospered because instruction in reading the Bible
generated the human capital crucial to economic prosperity.

County-level data from late 19th-century Prussia reveal that Protestantism

was indeed associated not only with higher economic prosperity, but also
with better education.

They find that Protestants’ higher literacy can account for the whole gap in
economic prosperity.

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 Trust and Growth

Algan and Cahuc 2010 “Inherited Trust and Growth" American Economic Review

Provide a new empirical strategy to uncover the causal effect of trust on growth.

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Who Trusts?

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Inherited Trust and Growth

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