Economics of Culture and Institutions

November 20, 2010 -
Alberto Bisin of NBER and New York University and Paola Giuliano of NBER and the University of California, Los Angeles, Organizers

Lawrence Blume, Cornell University; William Brock, University of Wisconsin; Steven N. Durlauf, University of Wisconsin and NBER; and Yannis M. Ioannides, Tufts University
Identification of Social Interactions

While interest in social determinants of individual behavior has led to a rich theoretical literature and many efforts to measure these influences, a mature "social econometrics" has yet to emerge. Blume, Brock, Durlauf, and Ioannides provide a critical overview of the identification of social interactions. They consider linear and discrete choice models as well as social network structures. They also consider experimental and quasi-experimental methods. In addition to describing the state of the identification literature, they indicate areas where additional research is especially needed and suggest some directions that appear to be especially promising.

Quamrul Ashraf and Oded Galor, Brown University
Cultural Assimilation, Cultural Diffusion, and the Origin of the Wealth of Nations

This research argues that variations in the interplay between cultural assimilation and cultural diffusion have played a signi cant role in giving rise to differential patterns of economic development across the globe. Societies that were geographically less vulnerable to cultural diffusion, benefited from enhanced assimilation, lower cultural diversity and, thus, more intense accumulation of society-specific human capital, enabling them to ourish in the technological paradigm that characterized the agricultural stage of development. The lack of cultural diffusion and its manifestation in cultural rigidity, however, diminished the ability of these societies to adapt to a new technological paradigm, which delayed their industrialization and, hence, their take-off to a state of sustained economic growth. The theory thus contributes to the understanding of the advent of divergence and overtaking in the process of development. Consistently with the theory, the empirical analysis establishes that (i) geographical isolation prevalent in pre-industrial times (i.e., prior to the advent of airborne transportation technology) has had a persistent negative impact on the extent of contemporary cultural diversity; and (ii) pre-industrial geographical isolation had a positive impact on economic development in the agricultural stage, but has had a negative impact on income per capita in the course of industrialization.

Stelios Michalopoulos, Tufts University, and Elias Papaioannou, Dartmouth College
Divide and Rule or the Rule of the Divided? Evidence from Africa

Michalopoulos and Papaioannou jointly investigate the importance of contemporary country-level institutional structures and local ethnicity-specific pre-colonial institutions in shaping comparative regional development in Africa. The authors use information on the spatial distribution of African ethnicities before colonization and exploit within-ethnicity (across countries) and within-country (across ethnicities) regional variation in economic performance, as proxied by satellite light density at night. The fact that political boundaries across the African landscape partitioned ethnic groups in different countries, thus subjecting identical cultures to different country-level institutions, offers a regression discontinuity framework. After identifying the partitioned ethnicities,the researchers document a positive cross-sectional association between national institutions and regional economic development. However, their ethnicity fixed-effects specifications show that differences in countrywide institutional arrangements do not explain differences in regional economic performance within ethnic groups. In contrast, they show that local ethnic traits proxied by tribal precolonial political institutions and class stratification even today exert a significant effect on regional development. The positive within-country effect of pre-colonial institutions also exists in regions of partitioned ethnicities along the national boundaries.

Yann Algan, Sciences Po; Pierre Cahuc, Ecole Polytechnique; and Andrei Shleifer, Harvard University and NBER
Teaching Practices and Social Capital

Algan, Cahuc, and Shleifer use several data sources to consider the effect of teaching practices on student beliefs, as well as on organization of firms and institutions. In student-level data, teaching practices (such as teachers lecturing versus students working on projects together) exert a substantial influence on student beliefs about cooperation, both with each other and with teachers. In cross-country data, teaching practices shape beliefs and institutional outcomes. The relationship between teaching practices and student test performance is nonlinear. The evidence supports the idea that progressive education promotes social capital.

Luigi Guiso, European University Institute; Paola Sapienza, Northwestern University and NBER; and Luigi Zingales, University of Chicago and NBER
Long Term Persistence

Is social capital long lasting? Does it affect long-term economic performance? To answer these questions, Guiso, Sapienza, and Zingales test Putnam's conjecture that marked differences in social capital between the North and South of Italy today were due to the culture of independence fostered by the free city-states experience in the North of Italy at the turn of the first millennium. The authors show that the medieval experience of independence has an impact on social capital within the North, even when they instrument for the probability of becoming a city-state with historical factors (such as the Etruscan origin of the city and the presence of a bishop in year 1,000). More importantly, they show that the difference in social capital among towns that in the Middle Ages had the characteristics to become independent and towns that did not exists only in the North (where most of these towns became independent) and not in the South (where the power of the Norman kingdom prevented them from doing so). Difference-in-difference estimates suggest that at least 50 percent of the North-South gap in social capital is due to the lack of a free city-state experience in the South.

Benjamin Feigenberg, MIT, and Erica M. Field and Rohini Pande, Harvard University and NBER

Building Social Capital through Microfinance (NBER Working Paper No. 16018)

Despite strong theoretical underpinnings, economic returns to social interaction have proven difficult to identify empirically. Feigenberg, Field, and Pande exploit random variation in the meeting frequency of microfinance groups during their first loan cycle to show that more frequent meeting is associated with long-run increases in social contact and lower default. Relative to clients who met on a monthly basis during their first loan, those who met weekly were four times less likely to default on their subsequent loan. The authors provide experimental and survey evidence that the decline is driven by improvements in informal risk-sharing that result from greater social contact.

Nicholas Bloom, Stanford University and NBER; Raffaella Sadun, Harvard University and NBER; and John Van Reenen, London School of Economics and NBER
The Organization of Firms across Countries

Bloom, Sadun, and Van Reenen argue that social capital, as proxied by regional trust, can improve aggregate productivity by facilitating greater firm decentralization. The researchers collect original data on the decentralization of investment, hiring, production, and sales decisions from Corporate Headquarters to local plant managers in almost 4,000 firms in the United States, Europe, and Asia. Anglo-Saxon and Northern European firms are much more decentralized than those from Southern Europe and Asia. Firms located in high trust regions are more likely to decentralize, even after the authors control for country dummies. Trust, together with the Rule of Law (which operates in a similar way to social capital,) explains about half of the variation in decentralization in the data. To help identify causal effects, the authors look within multinationals and show that (countrywide) bilateral trust between the Headquarter's country of origin and the affiliate's country of location increases delegation, even after instrumenting. Further, they find that social capital raises aggregate productivity because: 1) trust allows more efficient firms to grow in scale and sustains larger more productive enterprises; and 2) decentralization complements the adoption of new technologies and increases total factor productivity within firms.