Culture and Institutions PDF

NBER WORKING PAPER SERIES CULTURE AND INSTITUTIONS Alberto Alesina Paola Giuliano Working Paper 19750...

NBER WORKING PAPER SERIES CULTURE AND INSTITUTIONS Alberto Alesina Paola Giuliano Working Paper 19750 http://www.nber.org/papers/w19750 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 December 2013 We thank Benjamin Friedman and Andrei Shleifer for useful conversations and Janet Currie and six anonymous referees for excellent comments on an early draft. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2013 by Alberto Alesina and Paola Giuliano. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Culture and Institutions Alberto Alesina and Paola Giuliano NBER Working Paper No. 19750 December 2013 JEL No. P16,Z1 ABSTRACT A growing body of new empirical work has measured different types of cultural traits, showing that culture matters for a variety of economic outcomes. This paper focuses on one specific aspect of the relevance of culture: its relationship with institutions. Evidence from theoretical, empirical, and historical examples is reviewed to critically asses the presence of a two-way causal effect between culture and institutions. Alberto Alesina Department of Economics Harvard University Littauer Center 210 Cambridge, MA 02138 and IGIER and also NBER [email protected] Paola Giuliano Anderson School of Management UCLA 110 Westwood Plaza C517 Entrepreneurs Hall Los Angeles, CA 90095-1481 and IZA and also NBER [email protected]  1. Introduction Recent research convincingly shows that certain cultural variables determine many economic choices and even affect the speed of development and the wealth of nations.2 Researchers have now turned their attention to better understanding the mechanisms linking culture to various economic outcomes, the speed of the evolution of culture over time, and the relationship between cultural variables with others such as institutions and human capital. This paper investigates what we know about one specific aspect of the relevance of culture: the relationship between culture and institutions. Both terms are often vague in the literature; we will devote some space to defining them properly, and we will be very clear about how various authors have defined them differently. To begin with, both culture and institutions are endogenous variables, determined, possibly, by geography, technology, epidemics, wars, and other historical shocks. The question that one may try to answer is, however, “Which moves more slowly and which is more persistent?” In other words, can we say that cultural values (wherever they come from) are so deeply ingrained that institutional changes would not affect them, or on the contrary, that the types of institutions need to “fit” with the prevailing culture? Or, instead, would an institutional change somehow exogenously imposed, say because of conquest or a war, rapidly change the prevailing culture? How do culture and institutions interact? What leads to what? One “notable” example illustrates the complexity associated with this issue. Consider the work by Putnam et al. (1993) on social capital in Italy. Putnam and his colleagues took advantage of a natural experiment involving an institutional reform in Italy: in the early 1970s, a decision taken at the national level introduced new regional governments.3 They showed that these regional governments, designed to function identically everywhere in Italy, worked very differently in different parts of the country. The discrepancy was most pronounced between the center-north and the south. He hypothesized that the difference was due to differences in cooperation, participation, social interaction, and trust, which can be labeled as “social capital.” They also argued that regional differences in social capital had their roots centuries ago, as a function of whether or not different parts of Italy had experienced the institution of free cities, dating back to at least the twelfth century. Free cities developed some form of early participatory democracies, generating a feeling of 2 Several economics papers have investigated what are the cultural traits relevant for development, their persistence and their historical origins. Several surveys have analyzed some of these aspects (see Guiso, Sapienza, and Zingales (2006) and Fernandez (2008, 2011)). For an informal treatment of the question of how cultural values affect development, see Landes (1998). 3 The reform implemented a Constitutional article originally approved in the 1945 Constitution and can be reasonably thought as independent of regional development. 2 belonging to a polity, whose functioning could guarantee protection from aggression and the provision of public goods. As a result, free cities developed a deep sense of civic and cooperative behavior amongst their citizens, cultural traits that were transmitted from generation to generation. Guiso, Sapienza, and Zingales (2013) formally tested this hypothesis, finding considerable support for it. An Italian city’s level of social capital today, a “cultural” variable determining the success or failures of today’s institutions, is correlated with its historical experience as a free city in the Middle Ages. Thus, an institutional variable, the free-city arrangement, influenced a long-lasting cultural change that still affects the functioning of local governments in Italy. If cultural values were not so persistent, being a free city in the twelfth century would have nothing do with today’s institutions. At the same time, this long-lasting cultural trait was sparked by early forms of local self-determination, an institutional feature. However, the experience of a free city in the Middle Ages is clearly not an exogenous variable. Southern cities did not become free, because they remained subjugated by strong Norman kings. Conversely, the crumbling Carolingian Empire was weak in the northern parts of Italy. Even within central and northern cities, there is variation regarding which cities could more easily become free, due to geographic features that made them more or less capable of defending themselves against the emperor. Shocks could also change cities’ initial geographical endowment. Belloc, Drago, and Galbiati (2013), for example, show that earthquakes, and their associated disorder, favored the continuation of the status quo and made it more difficult for Italian cities to free themselves from their feudal lords. Can we therefore conclude that geography and earthquakes are the “cause” of the relative efficiency of local governments today in Italy? In some sense yes, but obviously the complex interactions between culture and institution linking geography to today’s policies cannot be dismissed as uninteresting “intermediate variables”! Those who study culture are well aware of the importance of institutions and, as we shall document below, they try as well as they can to isolate the effect of culture from institutions. This is probably because the importance of institutions is fairly well established.4 Since cultural economics is in its infancy, often those who write about institutions do not seem to worry about whether institutions are well identified and isolated from cultural influences, which may be quite problematic. Some may argue that culture is a vague variable, difficult to measure and full of errors. This is in part true, but as we shall demonstrate below, some institutional features suffer from the same 4 Various controversies remain regarding how, where, and in what sense institutions matter. See Glaeser et al. (2004). 3 measurement problem; many cultural traits can be measured at least as well as institutions. There is also often confusion in the literature about what is a cultural variable and what is an “institution”; one ancillary goal of this paper is to try to clarify these definitional issues. Our paper is structured as follows. At the outset, we specify what it is meant in the literature by culture, and how it is measured. Many new contributions to the literature have been added from the last two surveys on the relevance of culture on economic outcomes. Accordingly, we provide a map of the main cultural traits used in economics and their correlations. Next, we turn to the main goal of this survey: assessing the relationship between culture and institutions. To do this, we first review the existing empirical and theoretical literature that shows how culture can affect formal institutions. Second, we review recent studies that show how formal institutions affect culture. Finally, we document the interplay between culture and institutions and review the literature on how they jointly determine economic development. 2. What is culture and how do you measure it? 2.1. Definitions of culture Economists have used two different definitions of culture. One refers to the social conventions and individual beliefs that sustain Nash equilibria as focal points in repeated social interactions or when there are multiple equilibria. This view is due to Greif (1994), who defines cultural beliefs as “the ideas and thoughts, common to several individuals, which govern the interactions between them … and other groups and differ from knowledge in that they are not empirically discovered or analytically proven.” Particularly important, according to Greif (1994), are rational cultural beliefs, which are those “that capture expectations that others will take in certain circumstances.” Based on this insight, several authors have developed models where culture on the one hand is considered as beliefs about the consequences of one’s actions, but which can be manipulated by earlier generations or by experimentation. For example, Guiso, Sapienza, and Zingales (2008b) show how individuals’ beliefs are initially acquired through cultural transmission and then slowly updated through experience from one generation to the next. They do so by using an overlapping generation model in which children absorb their trust priors from their parents and then, after experiencing the real world, transmit their updated beliefs to their own children. The second definition of culture views it as a more primitive sentiment, such as individual values and preferences (see, for example, Akerlof and Kranton, 2000). This definition, also used in 4 psychology, emphasizes the role of emotions in motivating human behavior (Pinker (1997) and Kaplow and Shavell (2007)). This definition is also consistent with models in anthropology (Boyd and Richerson (1985, 2005)) that define culture as decision-making heuristics or “rules of thumb” used in an uncertain or complex environment. The use of rules of thumb in decision making can arise optimally, if acquiring information is either costly or imperfect. Those decision-making heuristics also very often manifest themselves as “gut feelings” about what the “right” or “wrong” thing to do is in certain circumstances. These gut feelings are cultural values—for example, the extent to which others can be trusted, whether women should work outside the home, or how important hard work is versus leisure. Thus the first definition of culture stresses beliefs; the second is closer to preferences, if one wants to adopt standard economic terminology. The two interpretations are not mutually exclusive. Benabou (2008) shows that values and beliefs interact systematically. He incorporates “mental constructs” into a political-economy model and shows that these mental constructs interact with institutions to generate different beliefs, which could persist over time. Indeed, it is hard to distinguish empirically between the two interpretations. Most empirical papers in literature follow the definition given in Guiso, Sapienza, and Zingales (2006), where culture is defined as “those customary beliefs and values that ethnic, religious and social groups transmit fairly unchanged from generation to generation.” By focusing on both beliefs (i.e., priors) and values (i.e., preferences), this definition merges the two described above. The existence of these two components of culture may also be useful in reconciling the empirical finding of the existence of both a slow-moving part of culture and a component that instead changes as a result of policies or institutions, as we shall discuss extensively below. As an example, take the case of views about inequality and redistribution. Luttmer and Singhal (2011) highlight a strong cultural persistence in the formation of preferences for redistribution by documenting a correlation between preferences for redistribution among second- generation immigrants and preferences for redistribution in the country of origin. Alesina and Glaeser (2004) relate this view to long-lasting differences in views about poverty that differentiate, for instance, Americans from Europeans. Meanwhile, Alesina and Fuchs-Schundeln (2007) and Giuliano and Spilimbergo (forthcoming) have shown that preferences for redistribution can be affected by political regimes or macroeconomic shocks. Alesina, Giuliano, and Nunn (2013) show that today’s attitude about women’s participation in the labor force is still affected by the adoption of certain agricultural technologies hundreds of years ago, and that the role of women in society can 5 evolve very quickly as a result of technological progress in home production, like dishwashers (Greenwood, Seshadri and Yorugoklu (2005)), medical progress (Albanesi and Olivetti, (2009)) or learning (Fogli and Veldkamp (2011) and Fernandez (2013)). So, while on the one hand culture can be slow-moving, inherited from past generations and shaped by historical shocks, because the underlying beliefs are transmitted from parents to children (Bisin and Verdier, 2001), culture can also be shaped by the current social, economic, or political environment. The prevalence of one of the two views depends on the two theoretical assumptions behind the evolution of culture: as belief about others that can be updated depending on the environment where individuals live, or as ingrained preferences and moral values, transmitted in early childhood, that take a long time to adjust. Therefore, it would be tempting to conclude that preferences (or gut feelings, or deep moral values, or ingrained social norms) are persistent and beliefs evolve over time more quickly. Unfortunately, as we discuss below, it is often hard to empirically disentangle beliefs from preferences. 2.2. Empirical measures of culture How do we measure cultural traits? Below, we review those cultural traits that have received the most attention so far in the empirical literature. a. Generalized trust The most studied cultural trait is a measure of generalized trust toward others. The importance of this trait cannot be overemphasized. For instance, Arrow (1972) writes, “Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence." This variable is measured in two ways: with survey questions and with laboratory experiments. In surveys, the question typically is, “Generally speaking, would you say that most people can be trusted or that you can’t be too careful when dealing with others?” Possible answers are typically either “Most people can be trusted” or “Need to be very careful.” This question can be found in such surveys as the World Values Survey (WVS), the General Social Survey, and the European Social Survey, and in most of the Barometers (the Latinobarometer, the Afrobarometer, the Asianbarometer, etc.). In most studies, this measure has been used as a proxy for social capital, i.e., “those persistent and shared beliefs and values that help a group overcome the free rider problem in the pursuit of socially valuable activities” (see Fukuyama (1995), Putnam (2000) and 6 Guiso et al. (2011)). Note that this is a measure of generalized trust; it refers to people the respondent doesn’t know. We discuss the issue of trust within a family below, in the context of our treatment of cultural values regarding the family.5 Individual characteristics such as education are positively correlated with trust. Being a member of a historically discriminated-against minority (say, African Americans) is negatively correlated with trust (Alesina and La Ferrara (2000)). Uslaner (2005) has shown that trust is a very persistent individual feature correlated with charitable contributions and volunteering. An important and robust result is that trust travels less well across than within racial or nationality groups. The level of trust is lower in ethnically diverse U.S. cities (Alesina and La Ferrara (2000, 2002). Also, individuals tend to trust more members of their own nationality relative to their trust of foreigners (Guiso, Sapienza, and Zingales (2009)).6 Trust has been shown to be relevant as an explanatory variable of economic development (Knack and Keefer (1997)) and individual performance (Butler et al. (2013)),7 financial development, participation in the stock market and trade (see Guiso, Sapienza, and Zingales (2004, 2008a, 2009)), innovation (Fukuyama (1995)) and firm productivity (Bloom, Sadun, and Van Reenen (forthcoming) and La Porta et al. (1997)). For a general review of the impact of trust on various economic outcomes, see the work of Algan and Cahuc (2013). The second way of measuring trust is by means of experiments, where subjects play trust games. The most common trust game is a two-player, sequential-moves game of perfect information in which the first mover, the “sender” is endowed with some fixed amount of money, and chooses how much of this endowment to send to the second mover, the “receiver.” Any money sent is increased by the experimenter according to a commonly known function before being allocated to the receiver. The receiver then chooses to return any amount to the sender, ending the game. With purely own-money-maximizing players, the Subgame Perfect Nash Equilibrium of this one-shot game is simple: receivers never return any money and consequently senders never send any money. 5 Many of the surveys listed above also ask questions regarding trust towards various institutions such as parliaments, governments, large corporations, and banks. While in part the response to these questions may reflect cultural biases, they may simply measure the efficiency or corruption of these institutions. We don’t consider these variables in the present paper. 6 These authors also show that this feature of trust may explain various forms of “home bias” observed in portfolio composition and various financial transactions. 7 Whereas at the aggregate level there is a positive correlation between trust and economic development, at the individual level the relationship is hump-shaped. The interpretation given by Butler et al. (2013) is that highly trusting individuals tend to assume too much social risk and to be cheated more often, ultimately performing less well than those with a belief close to the mean trustworthiness of the population. On the other hand, individuals with overly pessimistic beliefs avoid being cheated but give up profitable opportunities, and thus underperform. 7 Only with “trust” and trustworthiness can the pair take advantage of the possibility of increasing profits. In fact, in many experiments individuals “trust” each other and cooperate.8 A large experimental literature has distinguished between trust towards group members versus out-group members or trust within and outside the clan. In the myriad studies on trust towards group members versus out-group members, participants are divided into groups, with trivially defined distinctions. A common finding in this literature is that participants are willing to share more money or cooperate more with in-group members than with out-group members (Eckel and Grossman, 2005; Charness, Rigotti, and Rustichini, 2007; Chen and Li, 2009; Chen and Chen, 2010; and Butler, 2013). The classical study of trust in the clan is Fershtman and Gneezy (2001). In this study, participants play a trust game with opponents of distinct ethnic affiliations. The two ethnic groups in the game are Ashkenazic Jews and Eastern Jews. The authors find that the amount of money transferred to players of Eastern origin was significantly lower than that transferred to players of Ashkenazic origin. The mistrust of players of Eastern origin was however common not only among Ashkenazic players but also among Eastern players, who also discriminate among players from their own group.9 Glaeser et al. (2000) also find that trust and trustworthiness travel much more easily across the same ethnic, racial, and social groups in experiments performed with Harvard undergraduates from different backgrounds. Thus one of the strongest results that emerges both from surveys and from experiments is that familiarity, defined as belonging to the same social, ethnic, racial, or religious group, holding everything else constant, greatly increases interpersonal trust. The latter point is consistent with another measure of trust that some surveys offer, namely how much individuals of country i trust those of country j. The data show a “home bias” but also significant differences in how a certain country is “trusted” on average by foreigners. Guiso, Sapienza, and Zingales (2009) make both points using Eurobarometer data and relate bilateral trust to various types of international financial transactions and trade. b. Individualism versus collectivism Individualism, in Hofstede’s (2001) definition, is the degree to which individuals are integrated into groups. In individualistic societies, the stress is put on personal achievements and 8 For a discussion on the correlation between survey measures of trust and laboratory measures of trust, see Glaeser et al. (2000) and Fehr et al. (2002). 9 Other studies where the trust game is played among observable cultural groups are Bornhorst et al. (2010), Fershtman et al. (2005), and Willinger et al. (2003). 8 individual rights. People are expected to stand up for themselves and their immediate family, and to choose their own affiliations. In contrast, in collectivistic societies, individuals act predominantly as members of a lifelong, cohesive group or organization. Hofstede (2001) measures the degree of individualism in different societies by interviewing employees of IBM in 80 countries.10 He argues that individualism spurs innovation, whereas collectivism spurs cooperation and makes it easier to diffuse innovations developed elsewhere. One implication of his finding is that societies close to the technological frontier, where innovation is critical for growth, suffer from collectivism much more than societies that are still in the “imitation” stage. On the contrary, the latter may benefit more from some degree of collectivism. In collectivist environments, people have large extended families, which offer protection in exchange for loyalty. If an individual acquires wealth, he is supposed to share it with his extended family, or even with an entire clan or village. These arrangements substitute for the lack of safety nets and publicly provided social insurance.11Another measure of individualism has been developed by cross-cultural psychologist Shalom Schwartz (1992). He calls the measure of individualism “mastery”; this expresses the importance of getting ahead by being self-assertive.12 Individualism versus collectivism is the main cultural ingredient in the theoretical work by Greif (1994, 2006a). In empirical analysis, it has been used by Roland et al. (2013a) as a main cultural trait that could spur economic growth. Their work is discussed below. 10 In addition to individualism, Hofstede (2001) also studies four other orthogonal cultural dimensions: power distance, masculinity, uncertainty avoidance, and long-term orientation. Power distance focuses on the degree of equality, or inequality, between people in a given country. It represents the extent to which the less powerful members of organizations and institutions accept that power is distributed unequally. Masculinity reflects the degree to which the society does or does not reinforce the traditional masculine-work role model of male achievement, control and power. The assertive pole has been called “masculine” and the caring pole “feminine.” Uncertainty avoidance captures the society’s attitude towards uncertainty, while long-term orientation is associated with such values as thrift and perseverance as opposed to respect for tradition and fulfilling social obligation, which are associated with short-term orientation. While Hofstede’s measures have not been free from criticism, they constitute by far the most used and cited cultural framework in international business, management, and applied psychology. 11 See Olken and Singhal (2011) and Baland et al. (2011), among others. 12 Schwartz (1992) identified a set of 45 individual values recognized across cultures, covering all value dimensions necessary to explain intercountry cultural variation. He subsequently surveyed school teachers and college students from 67 countries, averaged the scores on each of the 45 values and identified seven dimensions along which national cultures could differ. These dimensions are conservatism, intellectual autonomy, affective autonomy, hierarchy, egalitarian commitment, mastery, and harmony. Conservatism represents a culture’s emphasis on maintaining the status quo, and on restraining actions or desires that may disrupt the solidarity of the group or the traditional order. Intellectual and affective autonomy refer to the extent to which people are free to independently pursue their own ideas and intellectual directions, and their affective desires, respectively. Hierarchy denotes the extent to which it is legitimate to distribute power, roles, and resources unequally, while egalitarian commitment refers to the extent to which people are inclined to voluntarily put aside selfish interests to promote the welfare of others. Mastery expresses the importance of getting ahead by being self-assertive, while harmony denotes the importance of fitting harmoniously into the environment. 9  c. Family ties Another important cultural value is the relevance of family ties in society. Becker (1991) provides an economic treatment of the organization of the family, but without accounting for any cultural variable. Banfield (1958) and Coleman (1990) focus on different cultural traits regarding family values. Both authors notice that societies based on strong ties among family members tend to promote codes of good conduct within small circles of related persons (family or kin); in these societies, selfish behavior is considered acceptable outside the small network. On the contrary, societies based on weak ties promote good conduct outside the small family/kin network, enabling one to identify oneself with a society of abstract individuals or abstract institutions. Alesina and Giuliano (2010) measure the strength of family ties using three WVS questions, capturing beliefs on the importance of the family in an individual’s life, the duties and responsibilities of parents and children, and the love and respect for one’s own parents. The first question asks how important the family is in one person’s life and can take values from 1 to 4 (with 1 being not important at all and 4 being very important). The second question asks whether the respondent agrees with one of two statements and can take the value of 1 or 2, respectively: (1) One does not have the duty to respect and love parents who have not earned it; (2) Regardless of what the qualities and faults of one’s parents are, one must always love and respect them. The third question prompts respondents to agree with one of the following statements (again taking the value of 1 or 2, respectively): (1) Parents have a life of their own and should not be asked to sacrifice their own well-being for the sake of their children; (2) It is the parents’ duty to do their best for their children, even at the expense of their own well-being. This measure is used to study the impact of culture on a variety of outcomes, including labor-force participation of women, young adults, and the elderly; political participation; measures of generalized trust; household production; and geographical mobility (see Alesina and Giuliano (2010, 2011b, 2013)). The main idea is that societies that rely too much on the family have a lower level of generalized trust and lower civic sense. In addition, according to the “male breadwinner hypothesis,” societies with strong family ties tend to have a higher level of home production, which is mostly done by women, young adults, and older people. Additional measures of family ties can be derived by objective measures based on frequency of contact between family members or how close to the parents children live after they leave their 10 parental house. For instance, in Spain, Greece, and Italy about 70% of children live less than five kilometers from their parents’ home, while in Denmark the figure is less than 30%.13 Strong family ties are also at the core of industrial structures based on family firms. Using a measure of family ties similar to Alesina and Giuliano (2010), Bertrand and Schoar (2006) indeed show that in cultures with strong family ties family capitalism is more common and that a larger fraction of firms are family businesses.14 The authors show that this industrial structure is suboptimal: nepotism in hiring normally decreases the average quality of the firm; in addition managers, who are normally family members, tend to be too risk-averse. Finally, on average, family firms tend to remain smaller. Several studies looking at European and Latin American countries show that, on average, family firms perform less well than nonfamily firms. Greif (2005, 2006b) uses the distinction between nuclear family and extended kinship groups to study how the nuclear family in medieval times facilitated the establishment and growth of corporations. Extended kinship groups helped facilitate trade and establish trust-based relationships. Greif and Tabellini (2012) show that the presence of the nuclear family in Europe as opposed to the clan (a group consisting of families that traced their patrilineal descent back to one common ancestor who settled in a given locality) in China was a key to explaining patterns of urbanization in Europe and not in China. Todd (1983, 1990) argues that different forms of family structures explain the diffusion or resistance to social changes in Europe, including Protestantism, secularism, and the acceptance and diffusion of communism. Todd characterizes family types along two dimensions. The first dimension is the vertical relationship between parents and children. This relationship is said to be “liberal” if children become independent from their parents at an early age and leave their parental home as soon as they get married, or “authoritarian” if children continue to depend on their parents in adulthood and still live with them after marrying. Todd’s second dimension is the horizontal relationship between siblings, based on inheritance laws or practices. The relationship is considered to be egalitarian if siblings receive an equal share of family wealth after their parents’ death, or nonegalitarian when parents can favor one offspring at the expense of the others and transmit family wealth only to one targeted child. 13See Alesina, Algan, Cahuc, and Giuliano (2013). 14The latter can be defined as a company in which a family holds control of a company, either by not trading it publicly or by holding majority stakes if it is a publicly traded company. See also Caselli and Gennaioli (2011) for evidence regarding inefficiencies in the management of family firms. 11  Todd’s two dimensions yield four possible family types of family organization. The absolute nuclear family, characterized by a relatively loose relationship between parents and children and by nonegalitarian inheritance rules. The egalitarian nuclear family, with relatively liberal relationships between parents and children and egalitarian inheritance rules among children. The stem family, characterized by an authoritarian vertical relationship and a non-egalitarian horizontal relationship. Finally, the communitarian family, characterized by cohabitation of parents and children and egalitarian inheritance rules.15 Absolute nuclear families are widespread in the United States, the United Kingdom, Australia, New Zealand, the Netherlands, and Denmark. Egalitarian nuclear families are prevalent in Italy, Spain, Greece, Portugal, Romania, Poland, Latin America, and Ethiopia. Stem families are common in Austria, Germany, Sweden, Norway, the Czech Republic, Belgium, Luxembourg, Ireland, Japan, Korea, and Israel, whereas communitarian families are common in Russia, Bulgaria, Finland, Hungary, Albania, China, Vietnam, Cuba, Indonesia, and India.16 Duranton et al. (2009) use Todd’s classification to explain regional disparities across Europe in household sizes, educational attainment, social capital, labor force participation, sectoral structure, wealth, and inequality. Galasso and Profeta (2012) use Todd’s classification to show that family structures are crucial for explaining different types of pension systems, and that Todd’s definition of nuclear and extended family is strongly correlated to the measure of family ties as defined in Alesina and Giuliano (2010).17 15 Todd's family classification is based on historical monographs dating back to the Middle Ages, in different regions of Western European countries. These monographs were collected by the church or other legal powers to track their local population and levy taxes. Todd combined these historical monographs with census data in the 1950s and found a very strong persistence of the family arrangement across European regions since the Middle Ages. 16 In his provocative book On the Origin of English Individualism, Macfarlane (1978) distinguishes two “ideal types” of societies based on different family structures: the peasant society, based on the extended household, self-sufficient villages, limited geographical and social mobility, early marriage arranged by the family, high fertility because children are an economic asset, and patriarchal and communal moral values; and the modern society, based on the nuclear family, production for the purpose of trade, interdependence of towns, controlled fertility, late marriage, and moral individualism. His main idea was that England displayed most of the features of modernity at least as far back as the fourteenth century. Therefore there was no transition to modernity. 17 A voluminous literature in anthropology has focused on other types of societal organizations, such as the clan (a unilineal group of relatives living in one locality), the kin group (a collection of various clans that comprises “socially recognized relationships based on supposed as well as actual genealogical ties” (Winick, 1956, page 302)) or the ethnic group (“a group that entertains a subjective belief in their common descent because of similarities of physical type or of customs or both, or because of memories of colonization and migration. This belief must be important for group formation; furthermore it does not matter whether an objective blood relationship exists” (Weber, 1978, page 389)). For more on the relationship between kinship groups and economic outcomes, see La Ferrara and Milazzo (2011) on how kinship differences in inheritance rules can affect economic outcomes; Fafchamps (2000) and Fisman (2003) on how belonging to the same clan has an impact on credit access; Luke-Munshi (2006) on how belonging to the same clan increases the probability of employment and of finding high-paying jobs. For a review on the relevance of kinship ties in development, see La Ferrara (2010). There is also interesting experimental evidence on how differences in kinship ties affect behavior in trust and ultimatum games. Barr (2004), for example, studies various villages in Zimbabwe. She 12  d. Generalized vs. limited morality Tabellini (2008a, 2010) builds a measure of generalized morality as opposed to limited morality as a cultural trait relevant in fostering economic development. “Limited morality” exists where cooperative behavior is extended only towards immediate family members, whereas “generalized morality” exists where cooperative behavior is extended toward everyone in society. The idea comes from Platteau (2000), who posited that in hierarchical societies, codes of good conduct and honest behavior are confined to small circles of related people (such as members of the family or the clan). Outside this small network, opportunistic and highly selfish behavior is regarded as natural and morally acceptable. By contrast, in modern democratic societies the rules of good conduct are valid in all social situations, not only in a small network of friends and relatives. This idea is related to that of (possibly extended) family ties.18 To measure generalized morality, Tabellini (2008) uses two questions taken from the WVS: a measure of generalized trust (as described above) and the value attached to respect for other people as one of the fundamental beliefs that should be transmitted from parents to children. This second measure, in particular, comes from an answer to the following question: “Here is a list of qualities that children can be encouraged to learn at home. Which, if any, do you consider to be especially important?” The variable “respect for other people” is defined as the percentage of people in a country who mentioned that tolerance and respect for other people is important. In a companion paper, Tabellini (2010) adds to the measures of trust and respect for other people the importance of obedience as one of the qualities that parents should transmit to their children (the good value is lack of obedience). He also adds a general measure of individualism as given by answers to the following question: “Some people feel they have completely free choice and control over their lives, while other people feel that what they do has no real effect on what happens to them.” Respondents answer on a scale from 1 to 10, where 1 means “none at all” and 10 means “a great deal.” Measures of generalized morality are relevant in explaining economic development across countries and among regions of Europe. compares two groups: a group of new villages set up in 1997 as resettlements consisting almost entirely of unrelated households and a control group of non-resettled villages made up almost exclusively of kins. She finds lower levels of trust in resettled villages, which she interprets as a result of lower density in kinship ties. 18 Greif and Tabellini (2012) associate generalized morality with the diffusion of the nuclear family in Europe, whereas limited morality was typical of China, where the clan was more diffused. 13  e. Attitudes toward work and perception of poverty Cultural attitudes towards work are obviously crucial. The Weberian theory of the birth of capitalism in a sense relies on this trait: the Protestant revolution, according to Weber, implied a different attitude towards hard work and success in the current life relative to the Catholic doctrine predominant in Europe at the time. This belief is measured using a question from the World Values Survey or the General Social Survey. The question typically asks the respondent to choose on a scale from 1 to 10 between the following two statements: “In the long run, hard work usually brings a better life” versus “Hard work does not generally bring success — it is more a matter of luck and connections.” Recent research has emphasized different views about the role of hard work in people’s life. Some people believe that hard work is the avenue for success, a road available to many, which leads to a relatively high level of social mobility. Others believe that success is determined instead mostly by luck and personal connections; as a result social mobility is low. These views tend to be deeply ingrained: people whose views differ may face the same reality and maintain for a long time different opinions about whether hard work is the key to success (Alesina and Glaeser (2004)). Several papers have shown that beliefs concerning the income-generating process could be central in determining the form of economic organization (Piketty (1995), Benabou and Ok (2001), Alesina, Glaeser, and Sacerdote (2001), Benabou and Tirole (2006), and Di Tella, Galiani, and Schargrodsky (2007)). Doepke and Zilibotti (2008) define a “middle class” belief using the work-versus-luck variable defined above as well as a variable regarding the importance of thriftiness as a value to be transmitted to children. These authors argue, similarly to Weber in a sense, that these two values were relevant for explaining the industrialization process and the demise of the landed aristocracy. A related issue concerns views about poverty. One question from the WVS asks whether the respondent believes that the poor could become rich if they tried hard enough.19 This statement could also imply a moral value regarding the poor: are they lazy or unfortunate20? Alesina and Giuliano (2011a), using WVS data, show that expectations about social mobility are strongly correlated to views about the poor. Alesina and Glaeser (2004) document the chasm between Americans and Europeans regarding this value judgment. They discuss the evolution of this 19 The WVS asks respondents their opinion about whether most people in the country have a chance of escaping from poverty or very little chance of escaping from it. 20 The WVS asks respondents their opinion about why there are people in the country who live in need. There are two different opinions: People are poor because of laziness and lack of will power, or people are poor because of an unfair society. 14 difference, and they relate this difference to the relative generosity of the respective welfare states. They also emphasize that poverty is viewed with less sympathy when it is correlated with racial differences, namely when the poor are disproportionately racial (or, more generally, linguistic or religious) minorities.21 f. Religion The literature on religion as a country’s primary expression of cultural norms is vast (see Guiso, Sapienza, and Zingales (2003) for a review). Several aspects of religion have been considered relevant for economic outcomes: Weber attributes the emergence of the spirit of capitalism to the development of a Protestant ethic, although recent empirical studies do not confirm this hypothesis (see Becker et al. (2009)). Putnam et al. (1993) focus on trust and claim that the Catholic tradition, which emphasizes the vertical bond with the Church rather than a horizontal bond with fellow citizens, negatively affects people’s average level of trust in others. There are two relevant issues related to religion. One is religiosity, namely the extent to which people devote time to attending religious services or, more generally, their involvement in religious activities. The second is whether different religious doctrines have different implications for economic behavior. These two issues have different implications. For example, Barro and McCleary (2003) find that economic growth responds positively to the extent of religious beliefs (beliefs in heaven or hell) but negatively to religiosity as measured by church attendance. Empirically, the relevance of religion has been measured in different ways, for example by looking at the fractions of religious denominations in a country; by focusing on specific beliefs, such as belief in heaven or hell; and by measuring the Weberian value of effort and self-determination. It is therefore difficult to summarize religion with a single, unique variable; for this reason, we exclude it in the correlations among different cultural traits analyzed below. Guiso, Sapienza, and Zingales (2003), however, show a positive correlation between religiosity and trust, and a negative correlation between religiosity and tolerance, among different cultures. g. Using evidence from migrants to measure the impact of culture One way of studying the role of preferences and cultural values, holding institutions constant, is to look at the behavior of immigrants from different countries in the same destination country, typically, but not exclusively, the United States. This is a sort of “natural experiment,” in which institutions are held constant (immigrants are born and raised in the United States and 21 For more on this point, see Alesina, Michalopoulos, and Papaioannu (2013). 15 therefore face the same institutional environment). Second-generation immigrants constitute a more appropriate sample compared to first-generation immigrants because issues of disruption and selection due to migration are more limited.22 This methodology implies running regressions where the left-hand-side variable is the outcome among second-generation immigrants and the dependent variable is the same outcome in the country of origin. The regressions show the relevance of culture, holding institutions constant, since immigrants face the same institutional environment. Persistence of cultural traits among second-generation immigrants has been found for female labor-force participation (Alesina and Giuliano (2010), Fernandez and Fogli (2010)).23 Giuliano (2007) shows that living at home with parents is also a cultural trait that immigrants bring with themselves. Luttmer and Singhal (2011) look at preferences for redistribution and find that immigrants from societies where the welfare state is more generous maintain those preferences in different destination countries.24 Grosjean (2011b)25 shows that the level of crime in U.S. counties today correlates to the settlement of the counties by herders from Scotland. The fraction of Scottish- Irish immigrants is a proxy for the relevance of a “culture of honor” and the associated violence that was transmitted from generation to generation. In this case, the fraction of immigrants of a certain origin can be seen as a proxy for a certain cultural belief. By isolating the importance of institutions, the evidence coming from the study of second- generation immigrants implicitly shows that some cultural traits travel with individuals when they move to a society with different institutions and values. Therefore cultural values are persistent, and moving to a place with different institutions does not change them immediately, certainly not within the timeframe of two generations. This finding does not contradict the possibility that the “melting pot” could work; the empirical question is, at what speed do cultural values converge? Perhaps, as hinted above, there may be parts of cultural traits that converge and adapt to different circumstances more quickly than others. h. Correlations among cultural traits Below, we report the cross-country correlations among most of the cultural traits highlighted above. As is apparent in Table 1, most traits are correlated, but not perfectly, as one would expect. In one case, the high correlation is built-in by construction: the one between trust and generalized 22 Also, it is not often obvious how self-selection would bias the results. 23 Fernandez and Fogli (2010) find similar results for fertility. 24 The authors use data from the European Social Survey and study immigrants in 26 destination countries. 25 On the relationship between a culture of honor in the United States and the presence of Scottish-Irish immigrants, see Nisbett et al. (1996). 16 morality, since the latter includes trust amongst its components. In other cases, the correlation is expected, for instance the one between family ties and individualism. Though all of these variables measure different types of cultural traits, they could also reflect various aspects of an underlying cultural belief of individualism, self-reliance, and independence on the one hand, versus collectivism, reliance on the extended family, and lower trust. Of all the cultural traits, the one that appears to be less systematically correlated with others is the relevance of hard work versus luck as a driver of economic success in life. Table 1. Correlations among cultural traits Family Generalized Individualism Trust Work- Middle-class ties morality luck beliefs Family ties 1 Generalized morality -0.49*** 1 Individualism -0.48*** 0.60*** 1 Trust -0.57*** 0.83*** 0.50*** 1 Work-luck 0.33*** -0.08 -0.24* -0.02 1 Middle-class beliefs -0.34*** -0.01 -0.14 0.06 -0.68*** 1 Data on individualism comes from Hofstede (2001). All the remaining variables are authors’ calculation using five waves of the World Value Survey. Family ties is the principal component of the following three questions: a) How important the family is in one person’s life (on a scale from 1 to 4); b) the second question asks the respondent to agree with one of two statements-one does not have the duty to respect and love parents who have not earned it versus regardless of what the qualities and faults of one’s parents are, one must always love and respect them; c) the third question prompts respondents to agree with one of two statements: parents have a life of their own and should not be asked to sacrifice their own well-being for the sake of their children versus it is the parents’ duty to do their best for their children even at the expense of their own well-being; generalized morality is the principal component of the following two questions. Generalized morality is obtained as a principal component of three questions: a measure of trust (defined below) and the answer to two different questions asking the respondent whether respect and obedience are qualities that children should be encouraged to learn at home. For trust the respondent is asked the question: “Generally speaking, would you say that most people can be trusted or that you can’t be too careful when dealing with others? Possible answers are either “Most people can be trusted” or “Need to be very careful”. For the question work-luck the respondent needs to choose between two statements: In the long run, hard work usually brings a better life or Hard work does not generally bring success, it is more a matter of luck and connections. Middle-class beliefs are calculated as a principal component of the work-luck belief and the question regarding the importance of thriftiness as a value to be transmitted to children. Figure 1 shows world maps depicting the geographical distribution of the various cultural traits. Northern European countries, together with the United States, Australia, and New Zealand, have high levels of trust, individualism, and generalized morality. The United States also emphasizes effort (as opposed to luck) as the main driver of economic success, whereas this belief is less prevalent in Northern European countries. Since this belief is strongly related to preferences for redistribution, the difference could be due to the vastly differing U.S. and European welfare systems (Alesina and Glaeser (2004)). 17  The Scandinavian countries have the lowest measure of family ties while the measures for African, Latin American, and some Asian countries are among the highest. Southern Europe measures high, but not among the highest. Similarly, the United States appears to have strong family ties, although the magnitude of the score is driven mostly by the question asking the importance of the family in a person’s life and not by strong links between parents and children (as summarized by the other two questions). Individualism is particularly high in the United States, Australia, and Northern Europe.26 Middle-class beliefs (as measured by Doepke and Zilibotti (2008)) seem to be strong in some emerging markets, such as China, Russia, and Brazil, and most of the Eastern European countries, together with Germany. Within each country, there is often substantial heterogeneity across regions. For instance, Guiso, Sapienza, and Zingales (2004), Tabellini (2010), and Alesina and Giuliano (2013) take advantage of regional differences regarding generalized morality, trust, and family values inside the regions of Italy, Europe, and the whole world, respectively. This regional heterogeneity is quite useful empirically, as we shall see below, since it allows studying the correlation of culture with various economic variables, holding national institutions constant. Regional variations, often large, also implicitly demonstrate that national institutions in general do not automatically generate a uniform culture, even though national rulers often try to enforce (sometimes aggressively) homogeneity amongst regions and populations.27 2.3. Where does culture come from? We argued above that neither culture nor institutions are exogenous. The Marxian view, for instance, would imply that cultural values, as well as institutions, are the result of the organization of production, technology, and class divisions. As far as culture is concerned, many recent papers have investigated the relevance of geography, natural disasters, or revolutions as determinants of culture. This paper is not the place to review in detail this literature, which in many ways is in its infancy, but still, a few examples are useful. Alesina et al. (2013) show that differences in female labor-force participation or, more generally, the role of women in society are related to the agricultural technologies used in 26 Italy, despite having strong family ties and a relatively low level of trust, appears to have a high score on this value, which is somewhat surprising. 27 See Laitin (2007) and Alesina and Reich (2013) for a recent discussion of this point. 18 preindustrial times, namely the use of the plow, which is determined by the geographical suitability of land to certain types of crops. Engerman and Sokoloff (1997) also emphasize the role of geography and endowments of land in explaining cultural differences between South and North America. Voigtlander and Voth (2013) show how the Black Death in Europe increased the need for labor and generated a shift in marriage age in some (but not all) parts of Europe.28 Voigtlander and Voth (2012) show the relevance of the presence of plague-era pogroms for the determination of anti-Semitism. Nunn et al. (2011) relate slave trading to current levels of mistrust in Africa. They argue that due to various geographical features, certain tribes more easily fell prey to slave traders, who were often helped by other African tribes. As well, Nunn (2009, 2013) provides excellent reviews of the role of history in the determination of cultural traits. 3. The definition and measurement of “institutions” 3.1 Definition There are two main definitions of institutions: institutions-as-equilibria and institutions-as- rules. The concept of institutions-as-equilibria is provided in Greif (2006a): “An institution is a system of ‘institutional elements,’ particularly beliefs, norms, and expectations that generate a regularity of behavior in a social situation. These institutional elements are exogenous to each decision-maker whose behavior they influence, but endogenous to the system as a whole. The social ‘rules’ which emerge correspond to behavior which is endogenously motivated — constrained, enabled, and guided by self-enforcing beliefs, norms, and expectations. In addition, for an institution to be perpetuated, its constituent elements must be confirmed by observed outcomes, reinforced by those outcomes, and inter-temporally re-generated by being transmitted to new comers.” The example given by the author describes the difference in institutions developed by Genoese and Maghribi traders in Medieval Europe. The Genoese society, characterized by individualistic cultural beliefs, experienced a higher demand for legal-contract enforcement than the collectivistic, kin-based community of the Maghribi traders. The Genoese developed formal institutions, including codified contract laws, double-entry bookkeeping, bills of lading, and other precursors of modern business practices. 28 See Alesina (2013) for a connection between this effect, the Protestant revolution, and the birth of capitalism. 19  The definition of institutions-as-rules dates back to Montesquieu (1749) and in more recent times to North (1990). It implies that institutions are the rules-of-the-game in a society, or more formally, the humanly devised constraints that shape human interactions. Institutions can be either formal rules — explicit, written documents such as laws and constitutions — or informal constraints, such as conventions and norms. In North’s theory, formal rules are created by the polity, whereas informal norms are “part of the heritage that we call culture.” An application of institutions-as-rules is the functioning of states. The state is the most important source of formal rules, including laws and constitutional mandates. Acemoglu and Robinson (2006) emphasize the difficulty in choosing efficient rules, due to commitment problems. The difficulty is also compounded because the rules might be “efficient” in a static sense but suboptimal in a dynamic sense. Acemoglu et al. (2001, 2002), for example, show that in places where Europeans found settlement difficult, they created “extractive states” aimed at transferring resources to the mother country. In areas more conducive to European settlement, they found it more profitable to build institutions aimed at protecting private property and encouraging investment. These institutions persisted even after independence and led to several reversals of fortune in the nineteenth century, because regions that had previously been poor inherited institutions that later enabled the societies to industrialize. The main difference between the two approaches is that in the institutions-as-rules approach, since rules are exogenous, institutions work best where there are well-functioning, transparent enforcement institutions and where the rules are easy to observe. If these conditions are not met, then the institutions-as-equilibria approach is a better model, because enforcement is endogenous and motivation is provided by norms and beliefs. In other words, the content of the rules and their enforcement are all determined endogenously (see Greif, 2011). In Greif’s work the connection between culture (beliefs and social norms) and institutions (rules and the working of society) is implicit in his definition. Culture and institutions are deeply interconnected and together determine a social equilibrium. His path-breaking work on medieval trade illustrates that well. North’s definition isolates institutions-as-rules in a way that is independent from cultural variables. In this respect, in principle, one could ask what causes what or which of two separate variables evolves more slowly. Needless to say, this is a daunting task. The two definitions of institutions are sometimes confused and opaque in the empirical literature. 20  3.2 Measurement It is, of course, difficult to provide “measures” of institutions in the definition of institutions-as-equilibria. However, many variables have been constructed to measure institutions-as- rules. One of the most common is an index of protection against expropriation (see Acemoglu et al. (2001)). These data, collected from Political Risk Services, report a value between 0 and 10 for each country and year, with 0 corresponding to the lowest protection against expropriation. Glaeser et al. (2004), however, object to this variable as a measure of institutions. They argue that this is a policy outcome and not an institution. They also argue that many regimes which would be clearly very different, such as democracies versus dictatorships, exhibit the same level of “protection of property rights.” Other measures of political institutions are those indicating constraints on the executive coded from the Polity IV dataset, and an index of democracy from the same source. Many other variables have been constructed to measure the “quality of government,” which broadly speaking can be viewed as a measure of well-functioning of the public sector, such as control of corruption and efficiency of the bureaucracy. However, though these variables are used as institutions, they are mostly policy outcomes.29 Another type of institution has to do with legal aspects. La Porta et al. (1997, 1998) have underscored the importance of “legal origins” as the critical rules that determine, for instance, investors’ protection and the development and efficiency of financial markets. Finally, there are regulatory institutions, such as labor-market regulations, regulations of markets for goods and services, antitrust laws, and various regulatory-environment indices that have been coded and assembled by the OECD, the World Bank, Djankov et al. (2002), and Botero et al. (2004), among others. A good summary of the institutional qualities discussed above is the World Bank’s Worldwide Governance Indicator (WGI). The WGI reports on six dimensions of governance for 215 countries from 1996 to 2011.30 Different aspects of institutional features are strongly correlated 29See La Porta et al. (1999). 30 These six dimensions are voice and accountability (the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media), political stability and absence of violence (measuring perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically motivated violence and terrorism), government effectiveness (about the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies), regulatory quality (the ability of the government to formulate and implement sound policies and regulations that permit and promote private-sector development), rules of law (capturing perceptions of the extent to 21 among each other, for example the correlation among the various WGI indicators is at least 0.8. Easterly and Levine (2003) also show that they are strongly correlated with the standard measure of protection of property rights, one of the most used measure of institutions. Various datasets, such as the Quality of Government Dataset compiled by the Quality of Government Institute at Goteborg University, have combined a large set of measures of institutional features (including property rights, rule of law, etc.) for a large set of countries from 1946 to today. 4. From culture to institutions 4.1 Culture and financial institutions An important literature emphasizes the importance of “legal origin” or, more generally, of financial institutions for the development of financial markets and their functioning (La Porta et al. (1998), Glaeser and Shleifer (2002)). However financial and trade-related institutions may themselves originate, evolve, and be shaped by cultural variables. A historical example of the relevance of culture on shaping institutions is provided by Greif (1994) in his analysis of the cultural differences between medieval Maghribi and Genoese traders. Maghribis held “collectivist” Judeo-Muslim beliefs and norms, which led them to develop different institutions from their “individualistic” Christian counterparts. The prevalence of collective relationships within a closely knit, exclusive group implied for the Maghribis an informal enforcement mechanism and therefore the lack of effective legal contract enforcement. The Genoese society, characterized by individualistic cultural beliefs, experienced a higher demand for legal contract enforcement than the collectivistic, kin-based community of the Maghribi traders. The Genoese developed formal institutions, including codified contract laws, double-entry bookkeeping, bills of lading, and other precursors of modern business practices. In Greif’s view, therefore, different cultural values were at the origin of the feasibility of private alternatives to the public legal system as a basis for economic transactions. Another extensively investigated case is the relevance of trust for various aspects of financial institutions. Different levels of trust may imply different needs regarding investors’ protections or other regulatory variables. Financial institutions would not “cause” financial development if deep cultural variables would work against it. The legal system could enforce financial contracts, but which agents have confidence in and abide the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence), and control of corruption (the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as “capture” of the state by elites and private interests). 22 without trust it would be extremely costly to involve courts in financial transactions. Thus cultural values (especially trust) lead to the development of financial markets and the type of regulation adopted. This is the argument made by Guiso, Sapienza, and Zingales (2004, 2008a, 2008b), in their examination of the role of trust in determining attitudes towards financial transactions and the development of financial markets — in short, the “financial depth” of a country. In their series of papers, the authors show many results. First, trust is strongly related to how individuals invest and participate in financial markets. The variation is large within the same legal system; in fact, they analyze within-country variation. For instance, use of cash, participation in the stock market, and use of bank loans versus loans from friends are all variables that affect the financial structure of a country, and these authors show that cultural values affect them much more than “standard” variables like risk aversion. The authors also assert that, at the macroeconomic level, the inclusion of cultural values could shed light on several puzzles in finance. For instance, stock-market participation is higher in countries with a higher level of trust; differences in the levels of trust could therefore explain low participation rates in various countries. Also, trust is much higher among citizens of the same country, thus investors hold a higher percentage of domestic assets than they “should” based on pure theories of portfolio diversification. The same authors show that a bilateral matrix of trust across countries explains a remarkable amount of cross-border holding of equities and Foreign Direct Investment. How does this work relate to the emphasis of La Porta et al. (1997, 1998) on legal institutions as determinants of financial development? Perhaps this is an example of what Greif defines as the social equilibrium including a combination of legal institutions and cultural variables. The interaction of certain legal origins (Anglo-Saxon ones) and a high level of trust present in those countries (as discussed above) lead to financial development. Guiso, Sapienza, and Zingales (2004) also show that differences in bilateral trust across pairs of countries have strong explanatory power in a standard gravity equation for trade flows. This correlation is robust to the inclusion of legal origins and institutions.31 Obviously, issues of reverse 31 Differences in the legal system could originate, in turn, from differences in cultural values, such as religious beliefs. Kuran (2005) shows that Islamic inheritance laws were an obstacle to the formation of the modern corporation, as emerged in Italy during the Renaissance. Community-building was central to Islam’s mission. At the birth of Islam, the Arabian Peninsula was divided into tribes bound together by blood ties. The strong bonds within one’s own tribe implied that intertribal alliances formed for defensive purposes were inherently unstable, with strong insecurity and harm 23 causation are a first-order problem here. Bilateral trade may increase bilateral trust rather than the other way around. The authors address this issue using instrumental variables. As an instrument for trust, they use commonality of religion and a measure of somatic distance.32 They also show an additional supporting piece of evidence: the correlation of bilateral trust and trade is strong for differentiated products and absent for standardized ones, like oil. Mutual trust is in fact more likely to be relevant only in markets where quality control, tastes, and diffusion of information are more important relative to a standardized market. 4.2 Culture, politics, and political regimes Can culture explain the diffusion of ideology? Why, for example, did only certain countries adopt Communism? The question is intriguing, since Marx and Engels predicted that Communism would “win” in industrialized Western Europe in the nineteenth century. Instead, it prevailed in agricultural, backward China and Russia, the exact opposite of the Marxist prediction and theory. Why? Todd (1990) offers a provocative answer: different economic ideologies found fertile ground, “won,” and developed political institutions in places where the underlying family structures, which go back at least to medieval times, were consistent with the ideology. Todd argues that communism prevailed in societies with communitarian families (authoritarian in the relationship between parents and children, and egalitarian among siblings). This is because individuals were accustomed, within the family, to the same authoritarian system adopted at the level of government institutions. On the contrary, the absolute nuclear family of England was a fertile ground for the development of nonegalitarian capitalism, individualism, and market freedom. What is amazing in Todd’s remarkable analysis is the presence of within-country heterogeneity, despite the existence of national institutions. For instance, in the case of Italy he relates the traditional prevalence of communist votes in central Italy with a specific type of family relationship in that part of the country. Note the connection between Todd’s argument regarding the extended egalitarian family and the prevalence of communism with the “collectivist” society in Greif (1994). In both cases, a horizontal line (the clan in Greif, the communitarian family in Todd) interferes with the value of to wealth creation. Islam responded to this broad need by promoting communal bonds based on religion rather than descent. The formation of these communal bonds was guaranteed by the presence of the waqs, a type of unincorporated trust. The reason for such an institution was based on the need to have an institution based on an individual instead of one involving self-governance by an organized group, such was the case of corporations during the Renaissance, for example. 32 The measure of somatic distance is based on the average frequency of three specific traits in the indigenous population, taken by Biasutti (1954): height, hair color (pigmentation), and cephalic index (the ratio of the length and width of the skull). 24 individualism, which brought about modern forms of capitalism. Alesina and Glaeser (2004) also relate the lack of development of a communist party in the United States with, among other things, the culture of individualism and the views about poverty discussed above. Roland et al. (2013b) study the importance of culture as a determinant of democratization. The authors construct a simple model of democratization that includes individualist and collectivist cultures. They show that countries having a more individualistic culture, despite potentially being less able to overcome collective-action problems, are more likely to end up adopting democracy faster than countries with a collectivistic culture. Empirically, they show that there is a strong causal effect from individualistic cultures to average polity scores, controlling for other determinants of democracy. To prove causality, the authors use (alternatively or together) two instrumental variables. The first is a measure of genetic distance between countries based on differences in frequencies of blood types within countries. This instrument is used as a proxy for vertical cultural transmission from parents to children. The second is a measure of historical pathogen prevalence. This variable has been argued to have a direct effect on the choice of collectivist culture because stronger pathogen prevalence created better survival prospects for communities that adopted more collectivist values, putting stronger limits on individual behavior, showing less openness towards foreigners, and strongly emphasizing tradition and stability of social norms. Not only the establishment of a democracy but also its functioning may depend on cultural variables.33 Nannicini et al. (2012) show that in localities with a higher level of social capital, citizens are more likely to hold politicians accountable for the aggregate social welfare of the community. They will punish politicians who pursue vested interests and grab rents for some specific groups. In contrast, uncivic agents vote based on their own or group-specific interest and are more tolerant with amoral politicians. Nannicini et al. (2012) convincingly test the prediction of their model by using cross-district variation in the criminal prosecution of members of the parliament in Italy. They find that these members are much less frequently reelected in districts with higher social capital. These results confirm the intuition by Banfield (1958). In his study of a village in Southern Italy, the author argued that the lack of social capital made villagers completely uninterested in checking up on self-interested politicians. In fact, these checkups constitute a public good, which like any other is undersupplied when social capital is low. Well-functioning political institutions also need citizens who are interested in and participate in politics, including not only voting occasionally but also engaging in time-consuming activities, in 33 Glaeser et al. (2007) argue that human capital is another precondition for democratic institutions to work. 25 addition to remaining informed. Alesina and Giuliano (2011) show that strong family ties are negatively correlated with political participation. Once again, this is consistent with the argument by Banfield (1958). 4.3 Religious values and institutions The most famous argument linking religion to the development of market-based capitalism is in the Weberian hypothesis of the protestant spirit of capitalism. In a similar vein, several authors have linked the specific nature of laissez-faire American capitalism to certain specificities of the American form of religiosity (Berkovitch (2011), McKenna (2007), Noll (2002)). These authors argue that specific traits of North American Protestantism and Calvinism lead to a close connection with religious beliefs and the role of the free market as almost a religious dogma. McKenna (2007) argues that being a nation of immigrants, Americans were kept together by religion (Protestantism and Calvinism) and by the principles of the Declaration of Independence. This is in contrast with European countries, where the glue was based upon similarity of norms and affinities built over centuries of coexistence. These religious views in the United States turned into a sense of patriotism, which accompanied the development of market institutions and accompanied this country for its entire history. Noll (2002) notes that between independence and the Civil War, “the expansion of market economies especially when linked to liberal principles about the rights of individuals certainly became a theological as well as a social factor.” He adds that in the same period, “the basic Protestant stance remained an uncomplicated acceptance of commercial society.” This would be in contrast with the Catholic Church, which has repeatedly warned against the excess of market freedom and professed antipathy (up until the present time) for Anglo-Saxon forms of capitalism. Differences in religious beliefs and religiosity may then also affect preferences for the redistributive role of the state. For instance, individuals belonging to the low-middle class may vote for laissez-faire, anti-redistributive policies if preferences for redistribution are linked to religious beliefs.34 So religiosity, cultural values, and preferences for welfare policies are strongly intertwined; Protestants may be more accepting of inequality than, say, Catholics.35 Certainly, even the Protestants and the Calvinists showed antipathy for excessive wealth and the immoral behavior associated with it, but they never abandoned the religious value of hard work, 34 Roemer (2001) argues that anti-redistributive politicians can then use religiosity and religious beliefs to bundle to their advantage the preferences of the voters. 35 Guiso, Sapienza, and Zingales (2003), however, show inconclusive evidence on this point. 26 commerce, and acquisition of prosperity. There is no sense of contradiction between these principles. Noll (2002) writes that “Protestants, regularly, consistently, and without sense of contradictions both enunciated traditional Christian exhortations about careful financial stewardship and simply took for granted the workings of the expanding United States’ commercial society.” Fisher (1989) also emphasized the relevance of differences in cultural beliefs in determining the institutional evolution of the United States. He describes the four migration waves of the original settlers and documents the laws that different groups established as a result of specific cultural values and beliefs. The Puritans, the first group, arrived in Massachusetts from East Anglia; they were known for their beliefs in the importance of education and for maintaining order. They established institutions consistent with these beliefs: they introduced laws promoting universal education and justice, together with town meetings and town covenants mimicking those of their country of origin. The Virginia Cavaliers, the second group, arrived from the South and Southwest of England and settled in the Chesapeake Bay; they believed that group inequality was a natural state of the world. Accordingly, they introduced laws with low taxes and low government spending; they didn’t emphasize the importance of education. For the Quakers, the third group, arrived from England’s North Midlands and settled in the Delaware Valley; their fundamental belief was the relevance of personal freedom. As a result, they established institutions emphasizing equal rights and limited government intervention. The final wave, the Scottish-Irish, arrived from Northern England, Scotland, and Ireland and settled in the backcountry of the U.S. South; they believed in freedom from any constraint. They espoused minimal government intervention and a very limited justice system. As this fascinating book shows, the beliefs brought to the United States by the various groups, who placed differing emphasis on freedom, equality, and government intervention, were crucial determinants in the establishment and subsequent development of the first institutions in the United States. Baltzell (1996) also compares the New England Puritans with the Philadelphia Quakers. The former were driven to intellectual and economic success. The latter displayed a culture of adaptation and indolence and were not especially prone to accumulate human capital and wealth. The historical narrative about the role of Protestantism on the development of capitalism in Europe and in the United States, with its special features, is quite convincing; however two recent papers raise some empirical issues. Cantoni (2013) studies the economic success of German cities, comparing those whose prince adopted Protestantism with those that remained Catholic. His empirical evidence is mixed at best. Becker and Woessman (2009) argue that the channel linking 27 Protestantism to the development of capitalism is the result not of the Weberian argument but rather of human capital. In fact, Martin Luther preached that everybody had to read the Bible (which he translated in German for that purpose). Thus everybody had to learn how to read, spurring the accumulation of knowledge. Guiso, Sapienza, and Zingales (2003) find a small, Weberian-type difference in attitudes between Protestants and Catholics in recent years, whereas they document the presence of an effect of religiosity on several attitudinal variables.36 5. From institutions to culture 5.1 Exogenous institutional changes and shocks In order to isolate the effect of institutions (as rules) on culture, one needs to identify institutional changes that are reasonably exogenous to cultural evolution. Not an easy task. Empirically, the effect of institutions on culture has been isolated in various ways. One possible source of institutional change for which we have data is the advent and the fall of Communism in Central and Eastern Europe. Roland (2004) argues that the culture of these countries has changed very little as a result of Communism. He documents that cross-country comparisons of various views as captured by the WVS do not change that much across countries as a result of Communism. Shiller et al. (1992) exploited the collapse of the Soviet Union and East Germany and explored the potential impact of socialism on individual attitudes. By using surveys on six countries, they found little evidence of the so-called Homo Sovieticus. Alesina and Fuchs-Schundeln (2007) develop a more stringent identification procedure, using the separation and reunification of Germany. Both events can be considered vastly exogenous to the preferences of Germans: separation due to a military defeat (and the actual border determined by postwar agreements between the Allies) and reunification due to the collapse of the Soviet Union. Taking advantage of the fact that before the separation the inhabitants of the two parts of Germany were ex ante uniform, these authors explore, using German opinion surveys after reunification, the effect of fifty years of Communism on Germans’ beliefs and preferences. The focus is on people’s views about the role of the state in the economy and in providing services and social insurance. They find that East Germans after reunification remain more pro-government than West Germans, possibly as a result of indoctrination or more simply because they had gotten used to an intrusive Clingingsmith et al. (2009) document various effects of a religious experience, namely the pilgrimage to Mecca (the 36 Hajj) by Pakistani Muslims. 28 government.37 Alesina and Fuchs Schundeln (2007) show that the convergence of preferences between former East Germans and West Germans is proceeding relatively quickly and should be complete in two generations. Becker et al. (2011) focus on the Hapsburg Austrian Empire. This regime was relatively benign and in fact developed modern state institutions and enforced the rule of law. They compare similar populations close to the historical borders of the empire and study whether today there is a difference in attitude towards the state of populations that were historically in and out of the empire. They find some effect on various measures of trust towards the government, but not all measures of trust show significant differences, so the results are interesting but a bit inconclusive. In a similar vein, Grosjean (2011a) examines location pairs within Eastern Europe and shows that the longer a pair was under the same empire historically, the more similar the reported social trust of the locations’ citizens today. Peisakhin (2010) surveys 1,675 individuals living in 227 villages located within 25 kilometers of the Habsburg-Russian border that divided Ukraine between 1772 and 1918. Relying on information on cultural traits based on answers to survey questions, Peisakhin (2010) documents a wide range of statistically significant cultural differences between the two groups. An interesting example of how a political shock could shape religious differences is analyzed by Botticini and Eckstein (2005, 2012). The authors have an intriguing interpretation of why Jews are so highly educated. A common explanation notes the religious norm for reading the Torah. But the authors instead posit that this trait developed after the destruction of the Second Temple in the first century. The Pharisees used education to limit the influence of the Sadducees over the Jewish community, when Jews were still farmers. Wars and economic shocks can also shape values and beliefs. The research into wars’ effect on attitudes has explored how a recent history of violence could shape norms of fairness. Whitt and Wilson (2007), for example, look at how people treat their in-group and how they treat the out- group. They do so by observing how much money individuals send in a dictator game to an anonymous but ethnically identifiable counterpart. The sample comprises 681 Muslims, Croats, and Serbs in postwar Bosnia-Herzegovina. Although the results indicate preferential in-group treatment, the incidence and magnitude of out-group bias is much less than expected. In a similar vein, Bauer et al. (2011) test the specific prediction that the experience of intergroup conflict shifts individual Obviously, the authors control for the fact that former East Germans may be more pro-government than former 37 West Germans simply because they are on average poorer. 29 psychological motivations to favor in-group egalitarianism. The authors administered a series of social-choice tasks, designed to isolate in-group egalitarian motivations from selfish or generalized egalitarian and altruistic motivations, to over a thousand children and adults who were differentially affected by war in both the Republic of Georgia and Sierra Leone. The authors show that exposure to conflict-related violence between the ages of 7 and 20 shifts people’s motivations to greater equality for in-group members. Overall, their results suggest that psychological reactions triggered by war during a particular developmental window generate more in-group-oriented egalitarian motivations. Other studies use behavioral games to link war and social motivations; in one, an ultimatum game conducted before, during, and after the Israel-Hezbollah conflict demonstrates that living in a society under an active, ongoing external threat temporarily increases the willingness of senior citizens to punish non-cooperators and reward cooperation (Gneezy and Fessler (2011)). Voors et al. (2012) reveal that in Burundi, people who have experienced war-related violence share more with their neighbors.38 Giuliano and Spilimbergo (forthcoming) look at how experiencing macroeconomic shocks when young affects beliefs regarding the role of luck versus effort as a determinant of economic success, as well as preferences for redistribution and political behavior. The authors show that individuals who grew up during a recession tend to support more government redistribution, believe that luck is more relevant than effort in determining economic success in life, and vote more for left-wing parties.39 The authors combine evidence from three data sources. First, they identify the effect of recessions on beliefs, exploiting time and regional variation in macroeconomic conditions using data from the 1972–2010 General Social Survey, which allows them to control for nonlinear time-period, life-cycle, and cohort effects, as well as a host of background variables. Second, they use longitudinal evidence drawn from the National Longitudinal Survey of the High School Class of 1972 (NLS72) to corroborate the age-period-cohort specification and look at heterogeneous effects of experiencing a recession during early adulthood. Finally, they confirm their findings with a sample of 37 countries whose citizens experienced macroeconomic disasters at different points in history, using data from the WVS. 38 Acemoglu et al. (2011) study the effect of the Napoleonic conquest on the institutions of the regions that fell under French domination. This paper, however, does not investigate cultural effects. 39 Malmendier and Nagel (2011) show that recessions make individuals more risk-averse and lower their propensity to invest in the stock market. 30  5.2 Experimental evidence An alternative approach for identifying the effect of institutions on culture is to observe in lab experiments how individuals behave in different institutional settings. In his seminal work, Henrich et al. (2001) study 15 small, preindustrial societies and show that group-level differences in economic organization and the degree of market integration explain much of the behavioral variation across societies: the higher the degree of market integration and the higher the payoffs of cooperation, the greater the level of cooperation in experimental games. Gneezy, Leibbrandt, and List (2012) look at the evolution of trust, cooperation, and coordination in different Brazilian fishing villages that differ along one major dimension: in one society, located by the sea, fishermen work in teams, whereas in the other society, located around a nearby lake, fishing is an individual activity. The authors find that the sea fishermen trust and cooperate more and have greater ability to coordinate group actions than their lake fishermen counterparts. Herrmann et al. (2008) conduct large-scale cooperation games with and without punishment opportunities in 16 cities (which should be a proxy for a different institutional environment). They find that cooperation and antisocial punishment is highest in Boston and Melbourne and the lowest in Athens and Muscat. The order is highly correlated with the rule of law and the transparency of institutions in the corresponding country. In the context of experimental games, a more sophisticated approach consists of mimicking and manipulating formal and legal rules. Compared to the simpler approach of observing individuals in a different institutional environment, this approach allows for a controlled experiment to estimate how people change their culture depending on exogenous variation in the rules of the games. The drawback is that formal and legal rules in experimental games differ from real-world institutions. Dal Bo et al. (2010) design a laboratory experiment to study how democracy affects cooperation. In particular, they are able to distinguish how cooperation changes when a policy is imposed endogenously through a democratic process or imposed exogenously. In their study, subjects participate in several prisoners’ dilemma games and may choose, by simple majority, to establish a policy that could encourage cooperation by imposing fines on non-cooperators. In some cases the experimental software randomly overrides the votes of the subjects and randomly imposes the policy. Before proceeding to play again with either the original or the modified payoffs, the subjects are informed of whether payoffs are modified and whether it was decided by their vote or by the computer. The authors show that the effect of the policy on the percentage of cooperative 31 actions is 40% greater when the policy is democratically chosen by the subjects than when it is imposed by the computer. 5.3 Culture and the market Bowles (1998) emphasizes the role of the fundamental economic institution, the market, in the formation of preferences/culture. This author develops a model in which the basic intuition is that the distribution of cultural traits in a population is determined as the equilibrium of a system whose exogenous elements are subject to the long-term influence of markets and other economic institutions. Economic institutions affect the evolution of preferences by changing these exogenous determinants of the cultural equilibrium. His main conclusion is that economic institutions (for him the market) may affect preferences through five different channels: their direct influence on situational construal, forms of rewards, the evolution of norms, and task-related learning, as well as their indirect effects on the process of cultural transmission itself. His main point is that “the production and distribution of goods and services in any society is organized by a set of rules, among which are allocation by fiat in states, firms, and other organizations. … Particular combinations of these rules give entire societies modifiers such as “capitalist,” “traditional,” “communist.” … One risks banality, not controversy, in suggesting that these allocation rules therefore influence the process of human development, affecting personality, habits, tastes, identities, and values.” He concludes that “the argument that economic institutions influence motivations and values is plausible, and the amount of evidence consistent with the hypothesis is impressive.” In particular, several ethnographic and historical studies recount the impact of modern economic institutions on traditional or indigenous cultures (see Bowles (1998) for a review of these studies). He also argues that the rise of feminist values, the reduction in family size, and the transformation of sexual practices coincided with the extension of women’s labor force participation. This last point has been more formally developed recently by Fernandez (2013) and Fogli and Veldkamp (2011), who show how women learn about the long-run payoff from working by observing nearby employed women. Culture would then quickly evolve over time as a result of this process: when few women participate in the market, information is scarce and participation rises slowly. As information accumulates, the effect of maternal employment becomes less uncertain and female labor force participation increases. 32  5.4 Regulation and culture Political institutions, regulation, and internal labor-market organizations are among other institutional characteristics that could shape differences in values. Gruber and Hungerman (2008) study the effect of changes in regulation (shopping hours) on religious practices (church attendance). The authors identify a policy-driven change in the opportunity