Cesifo Working Paper No. 8685
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8685 2020 November 2020 Comrades in the Family? Soviet Communism and Informal Family Insurance Joan Costa-Font, Anna Nicińska Impressum: CESifo Working Papers ISSN 2364-1428 (electronic version) Publisher and distributor: Munich Society for the Promotion of Economic Research - CESifo GmbH The international platform of Ludwigs-Maximilians University’s Center for Economic Studies and the ifo Institute Poschingerstr. 5, 81679 Munich, Germany Telephone +49 (0)89 2180-2740, Telefax +49 (0)89 2180-17845, email [email protected] Editor: Clemens Fuest https://www.cesifo.org/en/wp An electronic version of the paper may be downloaded · from the SSRN website: www.SSRN.com · from the RePEc website: www.RePEc.org · from the CESifo website: https://www.cesifo.org/en/wp CESifo Working Paper No. 8685 Comrades in the Family? Soviet Communism and Informal Family Insurance Abstract We study the effect of exposure to communism (EC), a political-economic regime based on collectivist planning, on preferences for family supports, which we refer to as ‘informal family insurance’. We exploit both cross-country and cohort variation in EC in a large sample of Central and Eastern European countries (CEEC). Against the backdrop that ‘communism gives rise to the abolition of the family’, we find robust evidence that EC strengthens the preference for family insurance which coexists with a stronger preference for social insurance. We find a six per cent increase in preferences for care to older parents and a four per cent increase in preferences for support to pre-school children and financial support to adult children. These effects are explained by the erosion of both generalized trust and the lower confidence in public institutions, suggesting that (raising uncertainty and adversity during) communism increased the demand for all types of available insurance. JEL-Codes: Z100, P300. Keywords: informal family insurance, family networks, social insurance, interpersonal trust, confidence in institutions, Soviet communism, Eastern Europe. Joan Costa-Font Anna Nicińska* London School of Economics and Political University of Warsaw / Poland Science (LSE) / United Kingdom [email protected] [email protected] *corresponding author November 3, 2020 The research was supported by the Polish National Science Centre from grant no. 2019/33/B/HS4/00387. We are grateful to Alberto Alesina, Benjamin Enke, Raquel Fernandez, Ernesto Dal Bo, Pedro Dal Bo and all NBER Summer Institute in Political Economy participants (July 2019), CESifo Social Protection Conference (April 2019), LSE and WNE colleagues, and ESPE conference participants (June 2019), Betul Akar, Eric Bonsang, Sarah Briely, Jan Falkowski, Dominik Hangartner, Jorge Garcia Hombrados, Kai Konrad, Stepan Mikula, George Ofosu, Panu Poutvaara, Pawel Strawiński, Arduino Tomasi, Sofia Trommlerova, Laura Valentini, Stephen Wolton, and Alessandro Zenati for their valuable comments. All errors are our own and the usual disclaimer applies. 1 Introduction Political-economic regime changes such as the adoption and exit from Soviet communism, a political-economic regime based on the collectivist planning of human needs, can provide suggestive evidence to examine the effect of institutions on preferences (Alesina & Giuliano, 2015). More specifically, they allow testing some of the contentious questions in economics and political philosophy, such as the impact of a communist regime on the family (Marx & Engels, 1848), and in particular on the preference for family insurance. So far, previous studies document a preference for social insurance drawing on evidence from Eastern Germany (Alesina & Fuchs-Sch¨undeln,2007). The main purpose of this paper is to fill this gap. Soviet communism made a profound impact on both formal and informal institutions during its half-century of constitutional adoption (Basu, Estrin & Svejnar, 2005; Di Tommaso, Raiser & Weeks, 2007; Shleifer & Treisman, 2005). Although family structures are argued to reflect the ideologies that have shaped the history of the 20th century (Todd, 1985) and to reinforce inequality (Marx & Engels, 1848), we contend that the family is one of the key informal institutions potentially influenced by communism. That is, against the backdrop of Todd (1985) the preference for family support (or informal family insurance) is endogenous to political regimes. How does Soviet communism affect family support? In an environment where privilege does not reflect in wealth accumulation, only `internal family 3 connections can pave the way to privilege, including access to education and elite positions' (Filtzer, 2014). Soviet communism brought about a collec- tive distribution of employment and its monetary returns, but it also limited the choice of career paths, rationed the access to permanent goods including housing, and in most severe cases, brought political persecution and dispos- session. These events entailed not just monetary costs but also psychological effects that individuals can react to by strengthening their family ties as well as other networks of support. Adverse life events encompass the modification of both formal and in- formal insurance, such as social insurance and informal support from family networks (henceforth family insurance). So far the economics literature has concentrated on examining the substitution between social insurance and family insurance (Abrams & Schitz, 1978). However, we contend that such substitution or complementary relations depend on wider institutional incen- tives of a political-economic regime (Bowles & Gintis, 1975). This paper documents that along with limited precautionary saving op- portunities, the exposure to Soviet communism (EC) shifts the demand for all types of formal and informal insurance (Di Tella & MacCulloch, 2002), thereby strengthening the networks of family and informal support, at the same time demanding more publicly funded social programs (Alesina, Glaeser & Sacerdote, 2001; Alesina & Fuchs-Sch¨undeln,2007). Next, we disentangle the effect the life-long indoctrination and the exposure during an individual's impressionable years, which influence the formation of preferences for social 4 and family insurance. We exploit various definitions of regime exposure, and different samples of countries, including the effect of historical legacies. Our results document a significant increase in the preference for informal family insurance resulting from EC. The effect complements a higher demand for social insurance not only in Eastern Germany, but in a sample of Eastern European countries. More general, these findings are consistent with the thesis that ideologies of family and social insurance are endogenous to a political regime. Our findings support the indoctrination hypothesis and document that EC leads to an erosion of both generalised trust as well as the trust in specific institutions1, which helps to understand the increase of the demand for either insurance type. We contribute to the literature in several ways. First, we show that EC exerts an influence above and beyond a shift in preferences for social in- surance (Alesina et al., 2001; Alesina & Fuchs-Sch¨undeln,2007), and more specifically, on preferences for informal family insurance. Second, we docu- ment that this effect is consistent with the indoctrination and impressionable years hypotheses, and an erosion of trust and confidence in public institu- 1This finding is consistent with Rainer and Siedler (2009), who document evidence of the erosion of social and institutional interpersonal trust in Eastern Germany after communism. Similarly, Booth et al. (2018) find detrimental effects in trust in China today and others establish a link between trust deterioration and the proximity to a Soviet gulag (Nikolova, Popova & Otrachshenko, 2019), and to government surveillance (by the Stasi police) (Lichter, L¨offler& Siegloch, 2019). These results are consistent with Aghion et al. (2010) who document a negative correlation between government regulation, typical of communist countries, and trust. 5 tions. Third, we contribute to a wider discussion on the role of markets in driving social preferences (McCloskey, 2006) and `civilising' individuals (Hirschman, 1997; Sandel, 2012)2. Fourth, this paper extends previous lit- erature by examining a larger set of countries under the Soviet influence in addition to Germany3. The next section describes how the paper adds to the wider and spe- cific literature. Section three describes the data. Next, section four contains the empirical strategy and section five reports the main results and hetero- geneity analysis, followed by mechanisms, threads to the identification, and robustness checks. A final section concludes. 2 Related Literature 2.1 Soviet Communism Regime Change. Shocks in the institutional environment, such as political- economic regime changes, are extremely uncommon (Schelling, 2006). Though, there are a few exceptions (Nee & Swedberg, 2005). The institution of Soviet 2Besley (2013), in discussing Sandel (2012), argues that the welfare effect of egalitarian alternatives to markets depends on the specific institutions of the country, and its underly- ing incentives. It is an empirical question whether markets or other rationing mechanisms add more welfare (Weitzman, 1977). 3Most of existing evidence refers to preferences of Eastern Germans, though a recent study by Becker et al. (2020) points to non-random selection in the exposure to com- munism in Germany. Therefore, we employ rich data from four different datasets that exhibit different