Journal of Economic Literature 2015, 53(4), 898–944 http://dx.doi.org/10.1257/jel.53.4.898

Culture and Institutions†

Alberto Alesina and Paola Giuliano*

A growing body of empirical work measuring different types of cultural traits has shown that matters for a variety of economic outcomes. This paper focuses on one specific aspect of the relevance of culture: its relationship to institutions. We review work with a theoretical, empirical, and historical bent to assess the presence of a two-way causal effect between culture and institutions. ( JEL D02, D72, I32, J12, Z13)

1. Introduction we also sum up how various authors have defined them differently. ecent research demonstrates that cul- Culture and institutions are endogenous Rtural variables determine many eco- variables determined, possibly, by geography, nomic choices—they even affect the speed technology, epidemics, wars, and other his- of development and the wealth of nations.1 torical shocks. Can any causal link between Researchers are now striving to better the two be established? How do culture and understand the mechanisms. institutions interact? In this paper, we investigate what we know One notable study—by Putnam (1993), about one specific mechanism: the relation- on in Italy—illustrates how ship between culture and institutions. Both complex these issues are. Putnam and his terms are often vague in the literature; we colleagues took advantage of a natural exper- devote space to defining them properly, and iment involving an institutional reform: in the early 1970s, Italy’s central government established fifteen new regional govern- ments.2 Ideally, they would function identi- * Alesina: Harvard University and IGIER Bocconi. Giuliano: University of California, Los Angeles, Anderson cally throughout the country, but in practice School of Management. We thank Benjamin Friedman and they didn’t. The discrepancy was most pro- Andrei Shleifer for useful conversations and Janet Currie, nounced between the center-north and the Steven Durlauf, and six anonymous referees for excellent comments. south. Putnam and his colleagues hypothe- † Go to http://dx.doi.org/10.1257/jel.53.4.898 to visit the sized that the variance was due to regional article page and view author disclosure statement(s). differences in levels of cooperation, partic- 1 Several papers have investigated what cul- tural traits are relevant for development, their persistence, ipation, social interaction, and —four 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 treat- 2 The reform, which implemented an article originally ment of the question of how cultural values affect develop- approved in the 1945 constitution, can be reasonably con- ment, see Landes (1998). strued as independent of regional development.

898 Alesina and Giuliano: Culture and Institutions 899 key “social capital” traits. They argued that document below, they try as well as they can these regional differences—dating back at to isolate the effect of culture from institu- least as far back as the twelfth century—are tions—probably because the importance of a function of whether the given region had institutions is fairly well established.3 Since experienced the institution of free cities. is in its infancy, those Free cities developed a form of early par- who write about institutions don’t seem to ticipatory democracy, generating a feeling worry much about whether institutions are of belonging to a polity, whose function- well identified and isolated from cultural ing could guarantee both protection from influences, which may be problematic. Some aggression and the provision of public . may argue that culture is a vague variable As a result, citizens of free cities developed a and difficult to measure. One of our ancil- deep sense of civic and cooperative behavior, lary goals here is to try to clarify these defi- a cultural trait they transmitted from genera- nitional issues. tion to generation. The rest of our paper is structured as fol- Guiso, Sapienza, and Zingales (2013) lows. In section 2, we define what culture formally tested this hypothesis, finding means in the economic literature, and how considerable support for it. A contempo- it is measured. Many contributions to the rary Italian city’s social capital, a “cultural” literature since the last two surveys discuss variable determining the success or fail- the relevance of culture on economic out- ure of its institutions, correlates with its comes. Thus, we provide a map of the main historical experience as a free city in the cultural traits used in economics and their Middle Ages. Thus, an institutional vari- correlations. We also provide definitions able, the ­free-city arrangement, influenced a and measurements of formal institutions. long-lasting cultural change that still affects In section 3, we scrutinize the relationship Italy’s local governments. If cultural values between culture and institutions, first by were not so persistent, being a free city in reviewing existing empirical and theoretical the twelfth century would have nothing do literature that shows how culture can affect with today’s institutions. At the same time, formal institutions, and then by reviewing this ­long-lasting cultural trait was sparked recent studies that show how formal institu- by early forms of local self-determination, an tions affect culture. Then, we document the institutional feature. interplay between culture and formal insti- The experience of a free city in the Middle tutions and review the literature on how they Ages is clearly not an exogenous variable. jointly determine . For example, even within central and north- ern cities, there is variation regarding which 2. Definitions and Measurement cities could more easily become free, due to of Culture and Institutions geographic features that made them more or less capable of defending themselves against 2.1 Definitions of Culture the emperor. Like geography, many other factors could have determined the relative Defining culture is an arduous task. We efficiency of local governments in Italy. Yet start by providing a definition, distinguish- the complex interaction between culture and ing between empirical and theoretical institutions is interesting, regardless of the “ultimate” causes. 3 Various controversies remain regarding how, where, Those who study culture are well aware and in what sense institutions matter. See Glaeser et al. of the importance of institutions and, as we (2004). 900 Journal of Economic Literature, Vol. LIII (December 2015) definitions of culture. The reason for the dis- culture, an important component of which is tinction is that the mapping between empir- cultural beliefs. Cultural beliefs are the ideas ical and theoretical concepts is often not and thoughts common to several people that straightforward. govern interaction—between these peo- On the empirical side, most papers (if not ple and among them, their gods, and other all) follow the definition adopted by Guiso, groups—and differ from knowledge in that Sapienza, and Zingales (2006), where cul- they are not empirically discovered or ana- ture is defined as “those customary beliefs lytically proved. In general, cultural beliefs and values that ethnic, religious, and social become identical and commonly maintained, groups transmit fairly unchanged from gen- and communicated.” Greif asserts there is eration to generation.” Empirical papers, a subset of “rational cultural beliefs, which therefore, combine values and beliefs in the capture people’s expectations with respect same definition. to actions that others will take in various On the theoretical side, values and beliefs contingencies. . . . Past cultural beliefs that are often treated differently. Several authors sustain Nash equilibria provide focal points have developed models in which culture in repeated social interactions or when there means beliefs about the consequences of are multiple equilibria.”4 one’s actions, but where these beliefs can Still others view culture as a more prim- be manipulated by earlier generations or itive phenomenon embodied in values and by experimentation. For example, Guiso, (see, for example, Akerlof and Sapienza, and Zingales (2008a) show how Kranton 2000). This definition, also used individual beliefs are initially acquired in psychology (Pinker 1997; Kaplow and through cultural transmission and then slowly Shavell 2007) emphasizes the role of emo- updated through experience, from one gen- tions in motivating human behavior. eration to the next. They use an overlapping The two interpretations are not mutu- generation model in which children absorb ally exclusive. Benabou (2008) shows that their trust priors from their parents and then, values and beliefs interact systematically. after gaining real-world experience, transmit He incorporates “mental constructs” into their updated beliefs to their own children. a political-­ model and shows that In this setting, multiple equilibria are pos- these mental constructs interact with insti- sible. In the no-trust-no- equilibrium, tutions to generate different beliefs, which beliefs of mistrust are transmitted from par- could persist over time. ents to children, who eventually shun trade Empirical investigation of the relevance of and therefore do not learn about the trust- culture on economic outcomes is fairly new worthiness of the population. Conversely, in in economics. So far, the goal of most cul- the high-trust-high-trade equilibrium, par- tural economics papers has been to establish ents transmit trust beliefs to their children, the relevance of culture. have which encourages trade and learning about devoted scant attention to disentangling the true trustworthiness in the population. A differences between a belief and a temporary shock to trust can move a society component. The term culture, thus far, has permanently from one equilibrium to the other. Greif (1994) integrates and sociological concepts to define the rele- vance of cultural beliefs. In his view, “sociol- 4 The importance of focal points was also recognized by Schelling (1960), who describes “focal points for each per- ogists and anthropologists consider the son’s expectation of what the other expects him to expect organization of society to be a reflection of its to be expected to do.” Alesina and Giuliano: Culture and Institutions 901 been ambiguous, indicating both values and strong correlation between the female labor beliefs.5 force participation today and female partici- For example, views differ on inequality pation in agriculture in preindustrial societ- and redistribution. Luttmer and Singhal ies, which was generated by differences in (2011) highlight the “value component” agricultural technologies hundreds of years and show a strong cultural persistence in ago.7 Meanwhile, Fogli and Veldkamp (2011) the formation of preferences for redistribu- and Fernandez (2013) emphasize a beliefs tion by documenting a correlation between component to explain the increase in female preferences for redistribution among sec- labor-force participation over time. These ond-generation immigrants and preferences two papers, which independently investigate for redistribution in the country of origin.6 how changes in culture generate changes in Meanwhile, Alesina and Fuchs-Schündeln female labor-force participation over time, (2007) and Giuliano and Spilimbergo (2014) present a dynamic model of culture in which have shown that preferences for redistribu- people hold heterogeneous beliefs regarding tion can be affected by political regimes or the relative long-run payoff for women who macroeconomic shocks—emphasizing the work in the versus those who work beliefs aspect of culture. at home. Both papers conclude that female Similar ambiguity exists in recent stud- labor-force participation has increased over ies of the role of women in society. Alesina, time as beliefs evolve due to intergenera- Giuliano, and Nunn (2013) emphasize the tional learning.8 value components of attitudes about women’s 2.2 Definitions of Formal Institutions participation in the labor force, by showing a North (1990) defines institutions as “the humanly devised constraints that structure 5 Culture is a relevant concept in many other disci- human interactions. They are made up of plines. An important paper in anthropology (Geertz 1973) formal constraints (rules, laws, constitu- posits that culture is “a historically transmitted pattern of meanings embodied in symbols, a system of inherited con- tions), informal constraints (norms of behav- ceptions expressed in symbolic forms by means of which ior, convention, and self-imposed codes of men communicate, perpetuate, and develop their knowl- conduct), and their enforcement characteris- edge about and their attitudes toward life.” Kinship, too, has been seen as a symbolic system and social institution. tics.” In North’s theory, formal rules are cre- Another view in anthropology (Boyd and Richerson 1985, ated by the polity, whereas informal norms 2005) is perhaps closer to the definition in economics. The authors define culture as decision-making heuristics or rules of thumb that have evolved to serve our need to make decisions in complex and uncertain environments. Using 7 For another example on how differences in technology theoretical models, the authors show that if acquiring can affect norms, see Fernandez-Villaverde, Greenwood, information is either costly or imperfect, using heuristics and Guner (2014). The authors construct a model of altru- or rules of thumb in decision making can arise optimally. istic parents exercising a direct socializing effort on their By relying on general beliefs, values, or gut feelings about daughters, at a cost, that rationalizes how technological the right thing to do in different situations, people may not improvement in contraception leads to a greater incidence always behave optimally, but they do save on the costs of in premarital sex and to a change in sexual mores. obtaining information they need to always behave opti- 8 Cultural differences are not the only factors that mally. Culture refers to these decision-making heuristics, explain female labor-force participation. The literature which typically manifest themselves as values, beliefs, or highlights competing stories, such as the importance of social norms. If decision-making heuristics manifest them- technological progress in home production, like the dish- selves as values, beliefs, or social norms, this definition washer (Greenwood, Seshadri, and Yorukoglu 2005), or could be similar to the one used in empirical papers such medical progress (Albanesi and Olivetti 2009). For other as Guiso, Sapienza, and Zingales (2006). explanations of changes in female labor-force participa- 6 Alesina and Glaeser (2004) relate this view to tion, see Galor and Weil (1996), Costa (2000), and Goldin ­long-lasting differences in views about poverty that differ- and Katz (2002). For a summary of the history of female entiate, for instance, Americans from Europeans. ­labor-force participation, see Goldin (1990). 902 Journal of Economic Literature, Vol. LIII (December 2015) are “part of the heritage that we call culture.” only if one counts formal institutions (formal Institutions, he says, are “the rules of the legal systems, formal regulation) as institu- game.” Acemoglu, Johnson, and Robinson tions. Thus, when we describe our measure- (2006) define institutions as mechanisms ment and when we review the literature on through which social choices are determined the interaction between culture and institu- and implemented; they distinguish between tions, we refer to culture as values and beliefs economic institutions and political institu- (one could say informal rules) and to institu- tions. The latter are mechanisms for the dis- tions as formal institutions. (This approach is tribution of political power across different also followed in most of the empirical papers socioeconomic groups. Political power, in trying to disentangle the two concepts.) turn, determines economic institutions. For Semantically speaking, we find it coun- example, in Acemoglu (2003), institutions terproductive and confusing to label culture are represented by an indicator denoting (meaning values and beliefs) as informal which political pressure group in a given institutions. We find it confusing to label set has the power to control social choice. “everything”—from, say, the level of recip- Institutional change is then the result of vol- rocal trust in a society to constitutional untary concessions by the controlling group, rules about voting systems—as institutions. possibly under the threat of social contract. Clearly—this is the crux of our paper— Greif (2006b) defines an institution as “a culture (or informal institutions) and formal system of social factors that conjointly gen- institutions are interrelated, but the label erates a regularity of behavior”—by “social “informal institutions” implies that formal factors,” he means “man-made, nonphysical institutions determine informal ones, and factors that are exogenous to each person that the latter are of secondary importance. they influence,” including “rules, beliefs, Once we agree that formal and informal norms, and organizations.” institutions interact, and that either one The two definitions are somewhat related, may cause the other, then identifying cer- with one main difference. In North’s defi- tain values and beliefs as culture or infor- nition, the rules of the game are distinct mal institutions becomes merely a matter from the way the game is played. Greif, on of semantics. We prefer the term culture the other hand, does not regard institutions over informal institutions; we find it more as exogenously specified rules. Instead, he appropriate and less confusing. Similarly, treats institutions as endogenous, emphasiz- for brevity, we sometimes refer to formal ing that the behavior of actors who enforce institutions simply as institutions. Formal the rules of the game must be explained by and informal institutions (or culture, as we institutions. According to Greif, institutions prefer to call them) can be complementary represent equilibria of a game, rather than and can interact. Think, for instance, about the rules of the game. legal formal institutions and trust. The for- The problem with both definitions of mer work better in a society with a high level institutions is that they overlap too much of trust, at the very least because with more with culture, as “norms” and “conventions” trust comes less litigation. Or, different cul- are used to define both institutions and cul- tural traits about the family and the relation- ture. This is especially true for Grief’s defi- ships between its members affect the legal nition, which we find too broad and hard to organization of the state. In fact, the quantify. main theme of the present paper is precisely Given this ambiguity, measuring culture the study of the interaction between formal and institutions separately would be possible institutions and culture. Alesina and Giuliano: Culture and Institutions 903

2.3 Measurement this approach include reverse causality and omitted variables. Economists have tried Economists have measured culture in solving these problems in several ways, three ways: using survey data; by looking at with varying success: Gorodnichenko and second-generation immigrants to isolate the Roland (2013a, 2013b), Guiso, Sapienza, and impact of culture, holding constant the eco- Zingales (2009), and Alesina, Giuliano, and nomic and institutional environment; and by Nunn (2013) used instrumental variables, collecting experimental evidence. Fernández though the exclusion restriction has been (2008) details the three approaches at length. problematic. Tabellini (2010) and Duranton, We discuss them briefly below, then turn our Rodríguez-Pose, and Sandall (2009) con- attention to survey data, the most commonly structed cultural variables at the regional used method for studying the interaction level, using country fixed effects to capture between culture and institutions.9 omitted cross-country differences. Tabellini The most common tool for measuring (2010) has also used regional instruments to culture is through survey questions,10 the solve the problem of reverse causality and answers to which are aggregated at the coun- omitted variables at the regional level; how- try level to measure values and beliefs.11 ever, despite progress, this does not solve These country-level summaries are then the exclusion restriction problem. Alesina, correlated with economic outcomes (see Giuliano, and Nunn (2013) went one step Knack and Keefer 1997 for the relationship further, not only examining variation across between trust and income).12 Drawbacks to countries and subnational districts but also using within-country variation controlling for subnational-district fixed effects.13 9 Many recent papers have investigated the historical determinants of culture. Nunn (2009, 2013) summarizes The second way of measuring the role the main determinants in six different groups: histori- of culture, holding institutions constant, cal US migration, traditional farming practices, the slave is to look at the way immigrants from dif- trade, European history, religion, and early-childhood experiences or various episodes in a person’s life. See Nunn ferent countries behave in the same des- (2009, 2013) for all the relevant references. A recent litera- tination country, typically (but not always) ture has also looked at the deep roots of intergenerationally the United States. This approach should transmitted traits. For a general discussion on this topic, capture vertical transmission of cultural see Spolaore and Wacziarg (2013). 14 10 The World Values Survey is the tool most commonly traits. The literature has been using mostly used for cross-country comparison. Other barometers— ­second-generation immigrants, who con- the Latino Barometer, Asian Barometer, Eurobarometer, and Afrobarometer, for example—focus on specific regions stitute a more appropriate sample than of the world. For the United States, it’s the General Social first-generation immigrants because issues of Survey. disruption and selection due to migration are 11 Another approach to calculating culture at the coun- try level consists of taking the coefficients of the country more attenuated. Though the issue of selec- fixed effects of a regression where the left-hand-side vari- tion due to migration is mitigated, it could able is the cultural value/belief after controlling for vari- ous individual-level characteristics. This approach solves concerns that the country-level average fails to capture the (2011), Pinotti (2012), and Gorodnichenko and Roland age composition of the population, differences in human (2013a, 2013b). capital, and so on. 13 The authors use evidence from eight different census 12 Most papers, starting from Knack and Keefer (1997), datasets, linking each ethnic group to its historical agricul- follow this strategy. For a review, see Guiso, Sapienza, tural technology. As the link with culture is made at the and Zingales (2006). For other more recent examples, individual level, they can control for subnational district see Aghion et al. (2010), Alesina et al. (forthcoming), characteristics. Alesina and Giuliano (2010, 2011a, 2013), Alesina, 14 See Bisin and Verdier (2001) for a model of vertical Giuliano, and Nunn (2013), Galasso and Profeta (2011), transmission and Bisin and Verdier (2011) for a general Guiso, Sapienza, and Zingales (2009), Luttmer and Singhal review of various channels of cultural transmission. 904 Journal of Economic Literature, Vol. LIII (December 2015) still be a ­concern. Different groups immi- By observing people from different coun- grated for different reasons and at different tries in the same institutional environment, times, hence the nature of self-selection dif- the evidence coming from the study of sec- fers. Most papers discuss how the nature of ond-generation immigrants shows that some self-selection biases the results. cultural traits travel with people when they This approach involves running regres- move to a society with different institutions sions where the left-hand-side variable is the and values. Therefore, cultural values are outcome among second-generation immi- persistent; when immigrants move to a place grants and the dependent variable is the with different institutions, overwhelmingly same outcome in the country of origin. The their cultural values change gradually, if ever, regressions show the relevance of culture, but rarely within two generations. holding institutions constant, since immi- Giavazzi, Petkov, and Schiantarelli (2014) grants face the same institutional environ- go further, presenting evidence on the speed ment. Persistence of cultural traits among of evolution (or lack thereof) of a wide range second-generation immigrants has been of values and beliefs of different genera- found for female labor-force participation tions of European immigrants to the United (Alesina and Giuliano 2010; Fernández and States. This paper is the first to provide evi- Fogli 2009).15 Giuliano (2007) shows that dence of transmission beyond the second living at home with parents is also a cul- generation. They find that persistence differs tural trait that immigrants bring with them- greatly across cultural attitudes. Moreover, selves. Luttmer and Singhal (2011) look at their study of higher-generation immigrants preferences for redistribution and find that supports both evolving and persistent traits, immigrants from societies where the welfare while limiting the analysis to the second state is more generous maintain those pref- generation unduly emphasizes persistence. erences in their destination countries.16 Further research is needed to understand Grosjean (2014) shows that crime levels in which cultural traits persist (and why) and US counties today correlate to the settlement which tend to disappear more quickly. of the counties by herders from Scotland. Experimental evidence—the third tool for The percentage of Scottish–Irish immigrants measuring the role of culture—has shown is a proxy for the prevalence of a “culture of how people from different behave honor” and the associated violence that were differently when playing trust, , transmitted from generation to generation. and ultimatum or dictator games. The classic In this case, the percentage of immigrants of reference is Henrich et al.’s (2001) study of a certain origin can be seen as a proxy for small-scale societies. A critical issue with the certain cultural beliefs.17 experimental evidence is the external validity: how much can be generalized by games played with small groups and how much can one 15 Fernández and Fogli (2009) find similar results for fertility. 16 The authors use data from the European Social Survey and study immigrants in twenty-six destination ­compelled by commitment­ to honor and duty and cannot countries. be explained simply by material and racial imper- 17 On the relationship between a culture of honor atives. Christian religious thoughts and sentiments were in the United States and the presence of Scottish–Irish also central to southern life (proslavery arguments often immigrants, see Nisbett and Cohen (1996). A different drew on biblical literalism). These pillars of race and reli- view on the culture of honor in the South is proposed gion in turn supported secession and strengthened the will by Wyatt-Brown­ (1982, 2001). The author sees the ethos to fight in the Civil War. The legacy of dishonor and humil- of honor at the heart of the traditional southern cul- iation that came with the Confederate defeat gave rise to ture. According to the author, the defense of slavery was the white racist rage that erupted in the 1890s. Alesina and Giuliano: Culture and Institutions 905 extrapolate general conclusions from them World Values Survey (WVS), the General about a country, an ethnic group, et cetera? Social Survey (GSS), and the European Experiments constitute an additional Social Survey, and in most of the barometers resource to measure cultural values such (the Latino Barometer, the Afrobarometer, as trust, in addition to the subjective mea- the Asian Barometer, etc.).19 sures that can be obtained by survey data. Individual characteristics such as edu- We will review this literature more closely in cation are positively correlated with trust. section 3, where we look at the interaction Historically discriminated-against minori- between culture and institutions. ties (African Americans, for one) have lower We turn our attention now to the cultural levels of generalized trust (Alesina and La traits that have so far received the most atten- Ferrara 2000). Uslaner (2008) has shown tion in the empirical literature. In describing that trust is a moral value, a persistent indi- these variables, we refer to culture as both vidual feature that doesn’t depend much on preferences and beliefs, without distinguish- life experiences.20 ing between the two; this is the approach taken Trust travels less well across than within in most papers that used these measures. racial or nationality groups. The level of trust is lower in ethnically diverse US cit- Generalized Trust: The most studied cul- ies (Alesina and La Ferrara 2000, 2002) tural trait is generalized trust toward others, and neighborhoods (Putnam 2000). Also, where others refers to people the respondent people tend to trust members of their own does not know.18 The importance of this trait ­nationality more than they trust foreigners cannot be overemphasized. Arrow (1972) (Guiso, Sapienza, and Zingales 2009).21 writes, “Virtually every commercial trans- action has within itself an element of trust, 19 In most studies, this measure has been used as a proxy certainly any transaction conducted over a for social capital, i.e., “those persistent and shared beliefs period of time. It can be plausibly argued and values that help a group overcome the free rider prob- lem in the pursuit of socially valuable activities” (Durlauf that much of the economic and Fafchamps 2005). (See also Fukuyama 1995; Putnam in the world can be explained by the lack of 2000; and Guiso, Sapienza, and Zingales 2011.) Another mutual confidence.” definition of social capital involves its relationship with networks. Coleman (1988), for example, discusses closure This variable is measured in two ways: in social networks, emphasizing the ability of small groups with surveys and laboratory experiments. In to monitor and pressure each other to behave. According surveys, the question typically is, “Generally to the closure argument, social capital is created by a net- work of strongly interconnected elements. A broader view speaking, would you say that most people of social capital is summarized in Durlauf and Fafchamps can be trusted or that you can’t be too careful (2005), who distinguish “three main underlying ideas: (1) when dealing with others?” Possible answers social capital generates positive for members of a group; (2) these externalities are achieved through are typically either, “Most people can be shared trust, norms, and values, and their consequent trusted” or “Need to be very careful.” This effects on expectations and behavior; (3) shared trust, question can be found in such surveys as the norms, and values arise from informal forms of organiza- tions based on social networks and associations. The study of social capital is that of ­network-based processes that generate beneficial outcomes through norms and trust.” 18 Many surveys ask questions regarding trust toward 20 He supports his claim by using two panel surveys—the various institutions such as parliaments, governments, 1972–74–76 American National Election Study (ANES) large corporations, and banks. While in part the response and the 1965–73–82 Parent–Child Socialization Study. to these questions may reflect cultural biases, they may Two-thirds of young people and more than 70 percent of simply measure the efficiency or corruption of these insti- their parents were consistent trusters or mistrusters. tutions. We don’t consider these variables in this paper. We 21 These authors also show that this feature of trust may discuss the issue of trust within a family, in the context of explain various forms of “home bias” observed in portfolio our treatment of cultural values regarding the family. composition and various financial transactions. 906 Journal of Economic Literature, Vol. LIII (December 2015)

Trust affects economic development A large experimental literature has distin- (Knack and Keefer 1997), individual perfor- guished between trust toward fellow group mance (Butler, Giuliano, and Guiso 2014),22 members versus out-group members, and financial development, participation in the trust within and outside the clan. In myriad , and trade (see Guiso, Sapienza, studies on trust toward group members ver- and Zingales 2004, 2008b, 2009), innovation sus out-group members—in which partici- (Fukuyama 1995), and firm pants were divided into groups with trivially (Bloom, Sadun, and Van Reenen 2012; La defined distinctions24—participants were Porta et al. 1997). For a review of the impact willing to share more or cooperate of trust on various economic outcomes, see more with in-group members than with out- Algan and Cahuc (2014). group members (Eckel and Grossman 2005; The second way of measuring trust is with Charness, Rigotti, and Rustichini 2007; experiments, primarily trust games. The most Chen and Li 2009; Chen and Chen 2011 and common is a two-player, sequential-moves Butler 2014). The results are similar when game of perfect information in which the people belong to groups defined according first mover, the “sender,” endowed with some to deeply rooted distinctions. In a classic fixed amount of money, chooses how much study of trust in the clan (Fershtman and money to send to the second mover, the Gneezy 2001), participants play a trust game “receiver.” Any money sent is increased by with opponents of distinct ethnic affiliations. the experimenter according to a commonly The experiment took place in , with two known function before being allocated to the ethnic groups: Ashkenazi Jews, the descen- receiver. The receiver then chooses to return dants of European Jews, and Eastern Jews, any amount to the sender, ending the game. the descendants of African and Asian Jews. With purely own-money-maximizing players, The authors found that the amount of money the subgame perfect Nash equilibrium of transferred to Eastern Jews was significantly this one-shot game is simple: receivers never lower than that transferred to Ashkenazi return any money and consequently senders Jews. Further, mistrust of Eastern Jews was never send any money. The sender’s behav- common not only among Ashkenazi Jews, ior is used as a measure of trust, whereas the but also among Eastern Jews themselves.25 receiver’s behavior proxies for trustworthi- Cross-country studies find that people ness. Only with trust and trustworthiness can tend to trust their compatriots more than the pair hope to increase profits. In fact, in they do people from other nationalities many such experiments people “trust” each (Guiso, Sapienza, and Zingales 2009). The other and cooperate.23 authors also highlight significant differences

22 Whereas at the aggregate level a positive correlation 24 The experimental literature focuses on trivially exists between trust and economic development, at the defined distinctions (such as expressed preferences individual level the relationship is hump-shaped. Butler, between pairs of abstract paintings by Klee and Kandisky) Giuliano, and Guiso (2014) hypothesize that highly trust- because the experimental method is driven by the search ing people tend to assume too much social risk and thus be for the minimal group, or the weakest cohesion that will cheated more often, ultimately performing less well than produce discriminatory behavior. The aim here is to under- people closer to the mean trustworthiness of the popula- stand whether group behavior is a generic human trait, tion. At the other end of the spectrum, people with overly rather than the outcome of blood, religion, or other deeply pessimistic beliefs avoid being cheated but give up - rooted traditions. able opportunities, and thus underperform. 25 Other studies on the trust game played among 23 For a discussion on the correlation between survey observable cultural groups are Bornhorst et al. (2010), measures of trust and laboratory measures of trust, see Fershtman, Gneezy, and Verboven (2005), and Willinger Glaeser et al. (2000) and Fehr et al. (2003). et al. (2003). Alesina and Giuliano: Culture and Institutions 907 in how a certain country is “trusted” on aver- cohesive, lifelong group or organization.26 age by foreigners, consistent with a trustwor- Another measure of individualism has been thiness interpretation of trust (Greeks, at the developed by cross-cultural psychologist bottom of the , are trusted much Shalom Schwartz (1992). He calls the measure less than Swedes, who are near the top of of individualism “mastery,” the importance of the trust distribution). These differences in getting ahead by being self-assertive.27 bilateral trust are crucial for explaining var- ious types of international financial transac- Family Ties: Another important cultural tions and trade. value is the relevance of family ties in society. Banfield (1958) and Coleman (1990) focus Individualism versus Collectivism: Several contributions (Greif 1994; Gorodnichenko 26 In addition to individualism, Hofstede (2001) studies and Roland 2013a, 2013b) have focused their four other orthogonal cultural dimensions: power distance, attention on one specific dimension of cul- masculinity, avoidance, and long-term orien- tation. Power distance focuses on the degree of equality ture: individualism versus collectivism. Many or inequality between people in a given country. It rep- cross-cultural psychologists consider this the resents the extent to which the less powerful members of main dimension of across organizations and institutions accept that power is distrib- uted unequally. Masculinity reflects the degree to which countries (Heine 2008). Gorodnichenko and a society reinforces the traditional masculine-work model Roland (2013a) explain why individualism of male achievement, control, and power. The assertive can be relevant for growth. By emphasizing pole has been called “masculine” and the caring pole “feminine.” Uncertainty avoidance captures a society’s personal freedom and achievement, indi- attitude toward uncertainty, while long-term orientation vidualism awards social status to personal is associated with such values as thrift and perseverance, accomplishments such as innovation. At as opposed to respect for tradition and fulfilling social obligation, which are associated with short-term orienta- the same time, this trait can make collec- tion. Hofstede’s measures have faced criticism, but they tive action more difficult because people constitute by far the most used and cited cultural frame- pursue their own interests without internal- work in international business, management, and applied psychology. Hofstede’s cultural database has been expanded izing collective interests. Collectivism, on to almost eighty countries. The most current version the contrary, makes collective action easier of the data is available at http://www.geert-hofstede.com/. because people are more able to internalize 27 Schwartz (1992) identified a set of forty-five indi- vidual values recognized across cultures, covering all group interests, but, by encouraging confor- value dimensions needed to explain intercountry cultural mity, discourages innovation. To show that variation. He subsequently surveyed school teachers and individualism is good for growth, the authors college students from sixty-seven countries, averaged the scores on each of the forty-five values, and identified built an endogenous growth model that cap- seven dimensions along which national cultures could tures the trade-off between the two traits. differ. These dimensions are conservatism, intellectual The commonly used measure for indi- autonomy, affective autonomy, hierarchy, egalitarian com- mitment, mastery, and harmony. Conservatism represents vidualism comes from Hofstede (2001). a culture’s emphasis on maintaining the status quo, and Individualism, measured in different societies on restraining actions or desires that may disrupt the sol- by interviewing IBM employees in thirty coun- idarity of the group or the traditional order. Intellectual and affective autonomy refer to the extent to which peo- tries, indicates the degree to which people ple are free to independently pursue their own ideas and are integrated into groups. In individualistic intellectual directions, and their affective desires, respec- societies, personal achievements and individ- tively. Hierarchy denotes the extent to which it is legiti- mate to distribute power, roles, and resources unequally. ual rights are stressed. People are expected Egalitarian commitment refers to the extent to which to stand up for themselves and their imme- people are inclined to voluntarily put aside selfish interests diate family, and to choose their own affilia- to promote the welfare of others. Mastery expresses the importance of getting ahead by being self-assertive, while tions. In contrast, in collectivistic societies, harmony denotes the importance of fitting harmoniously people act predominantly as members of a into the environment. 908 Journal of Economic Literature, Vol. LIII (December 2015) on different cultural traits regarding family one used by Alesina and Giuliano (2010), values. Both authors notice that societies Bertrand and Schoar (2006) show that in cul- based on strong ties among family mem- tures with strong family ties, family capitalism bers tend to promote codes of good conduct is more common and a larger percentage of within small circles of related persons (fam- firms are family businesses.29 The authors ily or kin); in these societies, selfish behavior show that this industrial structure is subopti- is considered acceptable outside the small mal: nepotism in hiring normally decreases the network. On the contrary, societies based average quality of the firm; in addition, man- on weak ties promote good conduct outside agers, who are normally family members, tend the small family/ kin network, enabling one to be too risk-averse. Finally, on average, fam- to identify oneself with a society of abstract ily firms tend to remain smaller. Several stud- individuals or abstract institutions. ies looking at European and Latin American Alesina and Giuliano (2010) measure the countries show that, on average, family firms strength of family ties using three WVS ques- perform less well than nonfamily firms. tions, capturing beliefs on the importance of Greif (2005, 2006a) uses the distinc- the family in a person’s life, the duties and tion between nuclear family and extended responsibilities of parents and children, and kinship groups to study how the nuclear the love and respect for one’s own parents. family in medieval times helped establish This measure is used to study the impact of cul- and grow corporations. Extended kinship ture on a variety of outcomes, including labor- groups helped facilitate trade and establish force participation of women, young adults, ­trust-based relationships. Greif and Tabellini and the elderly; political participation; mea- (2012) show that the presence of the nuclear sures of generalized trust; household produc- family in Europe, as opposed to the clan (a tion; and geographical mobility (see Alesina group consisting of families that traced their and Giuliano 2010, 2011a, 2014). Basically, patrilineal descent back to one common societies that rely too much on the family have ancestor, who settled in a given locality), in less generalized trust and lower civic sense. In China was a key to explaining divergent pat- addition, according to the “male breadwin- terns of urbanization in Europe and China. ner hypothesis,” societies with strong family Todd (1983, 1990) argues that different ties tend to have greater home production, forms of family structures explain the dif- mostly done by women, young adults, and fusion of, or resistance to, social changes in older people. Additional measures of family Europe, including Protestantism, secularism, ties can be derived by objective measures and the acceptance and diffusion of commu- such as frequency of contact between family nism. Todd characterizes family types along members or how close to the parents children two dimensions: vertical and horizontal. live after they leave their parental house. For The vertical relationship—between parents instance, in Spain, Greece, and Italy, about and children—is either “liberal,” if children 70 percent of children live less than five kilo- become independent from their parents at meters from their parents’ home, while in an early age and leave their parental home as Denmark the figure is less than 30 percent.28 soon as they get married, or “authoritarian,”­ Strong family ties are also at the core of industrial structures based on family firms. Using a measure of family ties similar to the 29 A family business is one in which a family holds con- trol of a company, either by not trading it publicly or by holding a majority stake if it is publicly traded. See also Caselli and Gennaioli (2013) for evidence regarding ineffi- 28 See Alesina et al. (forthcoming). ciencies in the management of family firms. Alesina and Giuliano: Culture and Institutions 909 if children continue to depend on their par- empirical analysis, but his historical narrative, ents in adulthood and still live with them with some descriptive statistics, describes the after marrying. The horizontal relation- various family systems and how they could be ship—between siblings—is either “egalitar- related to political and economic outcomes. ian,” when siblings receive an equal share Duranton, Rodriguez-Pose, and Sandall of family wealth after their parents’ death, (2009) use Todd’s classification of family ties or “nonegalitarian,” when parents favor one to explain regional disparities across Europe offspring at the expense of the others and in household sizes, educational attainment, transmit family wealth only to one child. social capital, labor-force participation, Todd’s two dimensions yield four possible sectoral structure, wealth, and inequal- types of family organization: the absolute ity. Galasso and Profeta (2011) use Todd’s nuclear family (liberal vertical relationship; classification to show that family structures nonegalitarian horizontal relationship), the are crucial for explaining different types of egalitarian nuclear family (liberal; egalitar- pension systems, and that Todd’s definition ian), the stem family (authoritarian; nonegal- of nuclear and extended family is strongly itarian), and the communitarian family correlated to the measure of family ties (authoritarian; egalitarian).30 Absolute nuclear defined in Alesina and Giuliano (2010).32 families are widespread in the United States, the United Kingdom, Australia, New Zealand, Generalized Morality: Tabellini (2008a, the , and Denmark. Egalitarian 2010) measures the relevance of ­generalized nuclear families are prevalent in Italy, Spain, Greece, Portugal, , Poland, Latin America, and Ethiopia. Stem families are features of modernity at least as far back as the fourteenth century. Therefore, there was no transition to modernity. common in Austria, Germany, Sweden, 32 A voluminous literature in anthropology has focused Norway, the Czech Republic, Belgium, on other types of societal organizations, such as the clan (a Luxembourg, Ireland, Japan, The Republic unilineal group of relatives living in one locality), the kin group (a of various clans that comprises “socially of Korea, and Israel. Communitarian fami- recognized relationships based on supposed as well as lies are common in Russia, Bulgaria, Finland, actual genealogical ties” (Winick 1956, p. 302)) or the eth- Hungary, Albania, China, Vietnam, Cuba, nic group (“a group that entertains a subjective belief in 31 their common descent because of similarities of physical Indonesia, and India. Todd provides no type or of customs or both, or because of memories of col- onization and migration. This belief must be important for group formation; furthermore it does not matter whether 30 Todd’s family classification is based on historical an objective blood relationship exists” (Weber 1978, p. 389). monographs dating back to the Middle Ages, throughout For more on the relationship between kinship groups and Western Europe. These monographs were collected by the economic outcomes, see La Ferrara and Milazzo (2011) on church or other legal powers to track their local popula- how kinship differences in inheritance rules can affect eco- tion and levy taxes. When Todd combined these historical nomic outcomes; Fafchamps (2000) and Fisman (2003) on monographs with census data from the 1950s, he found how belonging to the same clan affects access to credit; and that the four family arrangements have persisted through- Luke and Munshi (2006) on how belonging to the same out Europe since the Middle Ages. clan increases the probability of and of finding 31 In his provocative book On the Origin of English high-paying jobs. For a review on the relevance of kinship Individualism, Macfarlane (1978) distinguishes two “ideal ties in development, see La Ferrara (2010). Further, inter- types” of societies based on different family structures: esting experimental evidence shows how differences in the peasant society, based on the extended household, kinship ties affect behavior in trust and ultimatum games. ­self-sufficient villages, limited geographical and social Barr (2004), for example, compared two groups of villages mobility, early marriage arranged by the family, high fertility in : a group of villages set up in 1997 as resettle- because children are an economic asset, and patriarchal and ments consisting almost entirely of unrelated households communal moral values; and the modern society, based on and a control group of nonresettled villages made up almost the nuclear family, production for trade, interdependence of exclusively of kin. She found lower levels of trust in reset- towns, controlled fertility, late ­marriage, and moral individu- tled villages, which she interprets as a result of lower den- alism. His main idea was that England displayed most of the sity in kinship ties. 910 Journal of Economic Literature, Vol. LIII (December 2015) morality and limited morality in fostering His work is open to criticism: the WVS economic development. “Limited moral- contains numerous questions, so it is fair to ity” exists where cooperative behavior is ask why Tabellini chose those precise ques- extended only toward immediate family tions. Also, as we discuss below, the concept members; “generalized morality” exists of generalized morality seems a combination where cooperative behavior is extended of attitudes such as trust and individualism. toward everyone in society. The idea comes from Platteau (2000), who posited that “in Attitudes toward Work and the Perception hierarchical societies, codes of good conduct of Poverty: Cultural attitudes toward work and honest behavior are confined to small are obviously crucial. The Weberian argu- circles of related people (such as members ment about the birth of capitalism in a sense of the family or the clan). Outside this small relies on this trait: the Protestant revolution, network, opportunistic and highly selfish according to Weber, implied a different atti- behavior is regarded as natural and morally tude toward hard work and success in the acceptable. By contrast, in modern demo- current life relative to the Catholic doctrine cratic societies the rules of good conduct predominant in Europe at the time.34 This are valid in all social situations, not only in a belief is measured using a question from small network of friends and relatives.” This either the WVS or the GSS that typically asks idea is related to (possibly extended) family about the relevance of hard work versus luck ties and also collectivist versus individualistic in determining success in life. societies.33 Recent research has emphasized differ- To measure generalized morality, Tabellini ent views about the role of hard work. Some (2008a) combines, using a principal com- people believe that hard work is the avenue ponent analysis, two questions taken from to success, a road open to many, leading the WVS: a measure of generalized trust to relatively high social mobility.35 Others (as described above) and the value attached believe that success is determined mostly by to respect for other people as a fundamen- luck and personal connections; where this tal belief that should be transmitted from belief persists, social mobility is low. These parents to children. In a companion paper, views tend to be deeply ingrained: people Tabellini (2010) combines questions on four whose views differ may face the same reality measures, including trust; respect for other and maintain for a long time different opin- people; the importance of obedience as one ions about whether hard work is the key to of the qualities that parents should transmit to their children; and how much people feel they have free choice and control over their 34 The idea that a Protestant work ethic determined the higher prosperity of Protestant regions has been lives, compared to how much they feel that recently disputed. Becker and Woessman (2009) find that what they do has no real effect on what hap- it was the instruction in reading the Bible that generated pens to them. Both measures of generalized Protestant prosperity through accumulation of . Cantoni (forthcoming), using data on 272 cities in morality are relevant in explaining economic the German Lands of the Holy Roman Empire, find that development across countries and among Protestantism exerted no effect on . For a regions of Europe. critical view of Weber’s hypothesis, see Camic, Gorski, and Trubek (2004) and Gorski (2003). 35 Among OECD countries, social mobility (measured using estimates of the extent to which sons’ earning levels 33 Greif and Tabellini (2012) associate generalized correlate with those of their fathers) is low in the United morality with the diffusion of the nuclear family in Europe Kingdom, Italy, the United States, and France. By contrast, and limited morality with China, where the clan was more it is comparatively high in the Nordic countries, Australia, diffused. and Canada. Alesina and Giuliano: Culture and Institutions 911 success (Alesina and Glaeser 2004). Several mobility are strongly correlated to views papers have shown that beliefs concerning about the poor. Alesina and Glaeser (2004) the income-generating process could be argue that Americans’ and Europeans’ dif- central in determining forms of economic fering beliefs about this issue go a long way organization (Piketty 1995; Benabou and Ok toward explaining why the European welfare 2001; Alesina, Glaeser, and Sacerdote 2001; state is so much more generous than the Benabou and Tirole 2006; and Di Tella, American one. They also investigate the ori- Galiani, and Schargrodsky 2007). Doepke gins of this difference. and Zilibotti (2008) define a “middle class” belief using the work-versus-luck variable as The Relationships among Cultural Traits: well as a variable regarding the importance Cultural traits are clearly interconnected. of thriftiness as a value to be transmitted For example, in defining generalized versus to children. These authors argue, similarly limited morality, Tabellini (2008a) claims that to Weber, that these two values were rele- the notion of limited morality reaches back to vant for stimulating industrialization and the “amoral familism,” a term coined by Banfield demise of the landed aristocracy. (1958) in his study of a village in Southern A related issue concerns views about Italy. According to Banfield, the concept poverty. One question from the WVS asks of morality is valid only within the family, whether the respondent believes that the whereas amoral behavior is considered mor- poor could become rich if they tried hard ally acceptable and justified when interacting enough.36 This statement could also imply a with people outside the family. Strong family moral judgment regarding the poor: are they ties and limited morality are difficult to tease lazy or unfortunate? 37 Alesina and Glaeser out if one follows this definition. Also, gener- (2004) document the chasm between alized morality and trust are often treated as Americans and Europeans regarding atti- synonymous (see Tabellini 2008a; Glaeser et tudes toward the poor. They discuss the evo- al. 2000; and Guiso, Sapienza, and Zingales lution of this difference, and they relate this 2006, 2008a) because high levels of trust are difference to the relative generosity of the typically associated with high social capital respective welfare states. They also empha- and high civil capital. This is apparent in the size that poverty is viewed with less sympa- generalized morality variable, whose princi- thy when correlated with racial differences, pal component includes trust among the dif- namely when the poor are disproportion- ferent measures. ately racial (or, more generally, linguistic or Gorodnichenko and Roland (2014) try to religious) minorities.38 compare certain culture traits by linking find- Alesina and Giuliano (2011a), using WVS ings from social psychology to the economic data, show that expectations about social literature. Using evidence from cross- (Heine 2008, 2010; Oyserman, Coon, and Kemmelmeier 2002), they argue 36 The WVS asks respondents their opinion about whether most people in the country have a chance of that the ­individualism–­collectivism cleavage escaping from poverty or very little chance of escaping is the single most relevant dimension of cul- from it. tural traits. In cultural psychology, the differ- 37 The WVS asks respondents their opinion about why some people in the country live in need. Two different ences between individualism and collectivism opinions emerge: People are poor because of laziness and have deep roots that affect different forms lack of will power, or people are poor because of an unfair of behavior: they relate to different­ visions society. 38 For more on this point, see Alesina, Michalopoulos, of self, differences in cognitive behavior, and Papaioannu (2012). behavioral and motivational differences, and 912 Journal of Economic Literature, Vol. LIII (December 2015)

Table 1 Correlations Among Cultural Traits

Family ties Generalized morality Individualism Trust Work–luck

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 − − −

Notes: Family ties is the principal component of three questions: one about how important the family is in one per- son’s life (on a scale from one to four); and two that ask respondents 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”; and “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 compo- nent of three questions: one taking a measure of trust (defined below), and two asking respondents whether respect and obedience are qualities that children should be encouraged to learn at home. For trust, respondents are asked, “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 work– luck, respondents are asked 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.” *** Significant at the 1 percent level. ** Significant at the 5 percent level. * Significant at the 10 percent level. Sources: Data on individualism come from Hofstede (2001). The remaining variables are authors’ calculations using five waves of the World Value Survey. relational differences. The crucial distinc- them are correlated, though not perfectly, as tion is between the independent self and the one would expect. In one case, the high cor- interdependent self (Markus and Kitayama relation is forced: the one between trust and 1991), which in turn is associated with dif- generalized morality, since the latter includes ferent cognitive models and relational dif- trust among its components. In other cases— ferences. For example, the independent self for instance, the one between family ties and will tend to interact in the same way with individualism—the correlation is expected. everybody, whereas the interdependent self In figure 1, world maps depict the geo- will interact differently with in-group people graphical distribution of the various cul- than with others with whom relationships are tural traits. Northern European countries, less important or frequent (the out-group). together with the United States, Australia, This difference could help explain why more and New Zealand, have high levels of trust, generalized trust exists in individualistic cul- individualism, and generalized morality. tures than in collectivistic cultures, or why The United States also emphasizes effort individualistic and collectivistic societies (as opposed to luck) as the main driver of have different family structures. economic success, a belief less prevalent in If one looks at the cross-country correla- Northern European countries. Since this tions among cultural traits (table 1), most of belief is strongly related to preferences for Alesina and Giuliano: Culture and Institutions 913

Panel A. Generalized trust

Trust 0.4639733,1 ( ] 0.3163583, 0.4639733 (0.1946096, 0.3163583] (0, 0.1946096 ] No[ data ]

Panel B. Individualism

Individualism .7294118,1 (0 ] 0.4411765, 0.7294118 (0.1647059, 0.4411765] (0, 0.1647059 ] No[ data ]

Panel C. Family ties

Family ties 0.8077196, 1 ( ] 0.6565442, 0.8077196 ( ] 0.4523764, 0.6565442 ( ] 0, 0.4523764 [ ] No data

Figure 1. Geographical Distribution of Cultural Values (Continued ) 914 Journal of Economic Literature, Vol. LIII (December 2015)

Panel D. Generalized morality

Generalized morality 0.4877727, 1 ( ] 0.3426272, 0.4877727 ( ] 0.2580903, 0.3426272 ( ] 0.0476627, 0.2580903 [ ] No data

Panel E. Work–luck beliefs

Work–luck 0.5767357, 1 ( ] 0.460053, 0.5767357 ( ] 0.3106456, 0.460053 ( ] 0, 0.3106456 [ ] No data

Figure 1. Geographical Distribution of Cultural Values (Continued ) redistribution, the difference could be due links between parents and children. Indi­ to the vastly differing US and European wel- vidualism is particularly high in the United fare systems (Alesina and Glaeser 2004). States, Australia, and Northern Europe.39 The Scandinavian countries exhibit the low- Within each country, there is often sub- est measure of family ties while the measures stantial heterogeneity across regions. For for African, Latin American, and some Asian instance, Guiso, Sapienza, and Zingales countries are among the highest. Southern (2004), Tabellini (2010), and Alesina and Europe measures high, but not among the Giuliano (2014) take advantage of regional highest. Similarly, the United States appears differences regarding generalized morality, to have strong family ties, though the mag- nitude of the score is driven mostly by the 39 Italy, despite having strong family ties and a relatively question on the importance of the family in low level of trust, appears to score high on this value, which a person’s life and not by the questions on is surprising. Alesina and Giuliano: Culture and Institutions 915 trust, and family values inside the regions origins, with the laws of common-law coun- of Italy, Europe, and the whole world, tries (originating in English law) being more ­respectively. This regional heterogeneity is protective of outside investors than the laws quite useful empirically, as we shall see below, of civil-law (originating in Roman law), partic- since it allows studying the correlation of cul- ularly French civil-law, countries. Subsequent ture with various economic variables, hold- research showed that the influence of ing national institutions constant. Regional legal origins on laws and regulations is not variations, often large, also implicitly demon- restricted to finance. Government ownership strate that national institutions in general of banks (La Porta, Lopez-de-Silanes, and don’t automatically generate a uniform cul- Shleifer 2002), the burden of entry regula- ture, even though national rulers often try to tions (Djankov et al. 2002), and labor-market­ enforce (sometimes aggressively) homogene- regulations (Botero et al. 2004) vary systemat- ity on their regions and populations.40 ically across legal families. Finally, regulatory institutions—such as Measurement of (Formal) Institutions: labor-market regulations, regulations of mar­ One of the most common measures of formal kets for , antitrust laws, institutions is an index of protection against and various regulatory-environment indi- expropriation (see Acemoglu, Johnson, and ces—have been coded and assembled by the Robinson 2001). These data, collected from OECD, the , Djankov et al. (2002), Political Risk Services, report a value between and Botero et al. (2004), among others. zero and ten for each country and year, with A good summary of the institutional zero corresponding to the lowest protection qualities characteristics associated with against expropriation. Glaeser et al. (2004), governance is the World Bank’s Worldwide however, object to this variable as a measure Governance Indicator (WGI). The WGI, a of institutions, arguing that it’s an equilibrium report on six dimensions of governance for outcome and not an institution. For example, 215 countries from 1996 to 2011,41 found democracies and dictatorships can exhibit the same level of “protection of property rights.” Other standard measures of formal polit- 41 These six dimensions are voice and accountability (the extent to which a country’s citizens are able to par- ical institutions include constraints on the ticipate in selecting their government, as well as freedom executive and indices of democracy. Variables of expression, freedom of association, and a free media), have also been constructed to measure the political stability and absence of violence (measuring per- ceptions of the likelihood that the government will be “quality of government”—broadly speaking, destabilized or overthrown by unconstitutional or violent a measure of how well the public sector is means, including politically motivated violence and terror- functioning—such as control of corruption ism), government effectiveness (about the quality of public services, the quality of the civil , and the degree of and efficiency of the bureaucracy. its independence from political pressures; the quality of Then there’s the legal system. La Porta et al. policy formulation and implementation; and the credibility (1997, 1998) provided a measure of legal rules of the government’s commitment to such policies), regula- tory quality (the ability of the government to formulate and governing investor protection for many coun- implement sound policies and regulations that permit and tries using national commercial (primarily promote private-sector development), rules of law (captur- corporate and bankruptcy) laws. The authors ing perceptions of the extent to which citizens have confi- dence in and abide the rules of society, and in particular argue that legal rules protecting investors the quality of contract enforcement, property rights, the ­varied systematically among legal traditions or 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 40 See Laitin (2007) and Alesina and Reich (2013) for petty and grand forms of corruption, as well as “capture” of discussions on this point. the state by elites and private interests). 916 Journal of Economic Literature, Vol. LIII (December 2015) that institutional features are strongly cor- be appropriate: two dealing with electoral related—at least 0.8 among the various systems (“plurality” and “proportional rep- WGI indicators. Easterly and Levine (2003) resentation”) and two dealing with judicial also show that they are strongly correlated constraints on government (“judicial inde- with the standard measure of protection of pendence” and “constitutional review”). The property rights, one of the most used mea- first two measures are motivated by the work sures of institutions.42 As such, they are nor- of Persson and Tabellini (2003), and the mally used interchangeably in the empirical second two are taken from La Porta et al. analysis. (2004).45 These objective measures are also These measures of institutions have been only weakly correlated with the other institu- widely used. Glaeser et al. (2004), however, tional measures that the authors themselves emphasize some conceptual problems with criticize. These considerations should be them43—they neither measure policy con- taken into account when using institutional straints nor are they stable; rather, they are measures in the empirical analysis. measures of policy choices44—and suggest ways to improve the way institutions are 3. The Relationship between Culture measured. For example, they suggest that and Institutions constitutional measures would be a better measure because they constrain behavior Generally, studies looking at the relation- and are more likely to be permanent. At ship between culture and institutions tend the same time, they note that “it is possible to isolate one causal aspect, favoring one of that these constitutional measures are noisy, two directions. A more promising research and it is certain that ‘rules on the books’ are agenda has, on the other hand, emphasized different from what actually takes place in a a feedback effect between the two—given country. But this is precisely the point: the this interdependence, both institutions and institutional outcomes that scholars have culture coevolve, which can generate mul- used as measures of constraints have little to tiple stable equilibria with different sets do with the constitutional constraints, raising of self-enforcing institutions and cultural doubts about the effectiveness of changing norms. In this section, we first review the political rules.” set of papers looking at univariate causal From this proposition, it therefore seems explanations; we then discuss the papers that one should measure both de jure looking at the joint evolution of culture and and de facto institutions and assess when institutions and their effect on economic they deviate. Glaeser et al. (2004) suggest activity. some measures of institutions that could 3.1 From Culture to Formal Institutions Historical narratives of the relevance 42 Various datasets, such as the Quality of Government of culture on formal institutions: Several Dataset, compiled by the Quality of Government Institute at Goteborg University, have combined numerous mea- studies on the relevance of culture on sures of institutional features (including property rights and rule of law) for a large set of countries from 1946 to the present. 45 Judicial independence is the average of three com- 43 The authors cite the International Country Risk ponents: (1) the tenure of highest ordinary court judges, Guide, the Governance Indicators of the World Bank, and the tenure of administrative court judges, and a dummy the Polity IV measures. coded 1 if judicial decisions are a binding source of law. 44 The authors stress two relevant characteristics of Constitutional review is the sum of the rigidity of consti- institutions: that they constrain behavior and that they are tutions and the extent of judicial review (none, limited, or permanent or stable. full). Alesina and Giuliano: Culture and Institutions 917 institutions provide historical narratives enforcement mechanism and therefore the of specific cases. Fischer (1989), studying lack of effective legal contract enforcement.­ the evolution of institutions in the United The Genoese society, characterized by indi- States, documents how cultural beliefs vidualistic cultural beliefs, experienced a brought by the four migration waves of higher demand for legal contract enforce- the original settlers generated stark dif- ment than the collectivistic, kin-based com- ferences in laws. First came the Puritans, munity of the Maghribi traders. The Genoese arriving in Massachusetts from East Anglia. developed formal institutions, including cod- Known for valuing education and order, ified contract laws, double-entry bookkeep- they introduced laws promoting universal ing, bills of lading, and other precursors of education and justice, together with town modern business practices. In Greif’s view, meetings and town covenants mimicking therefore, different cultural values gave rise those of their country of origin. Next came to the feasibility of private alternatives to the the Virginia Cavaliers, who settled in the public legal system as a basis for economic Chesapeake Bay from the south and south- transactions. west of England. Their beliefs emphasized A third example aims for a cultural inter- group inequality as a natural state of the pretation of the development of political world; they introduced laws with low taxes systems around the world. In a provocative and low government spending and placed book, Todd (1990) argues that the develop- little emphasis on education. The Quakers, ment of political systems around the world who arrived next from England’s North is a function of underlying values ingrained Midlands and settled in the Delaware Valley, in people from an early age through fam- revered personal freedom, and thus estab- ily systems: parent–child relations within lished institutions emphasizing equal rights the family determine the attitude toward and limited government intervention. The liberal or authoritarian ideologies, whereas final wave, the Scottish–Irish, arrived from egalitarian inheritance practices among Northern England, Scotland, and Ireland, siblings lead to egalitarian ideologies. The settling in the backcountry of the US South. appeal of differing modern ideologies They believed in freedom from any con- results from their mirroring the character straint and, as a result, espoused minimal of various family types; and such ideolo- government intervention and a limited jus- gies spread only so far as the geographical tice system. Clearly, the beliefs brought to extent of the family systems with which the United States by these four groups were they have similarities. This, in his view, crucial determinants in the establishment should partially explain differences in ideol- and subsequent development of the first ogies around the world, including commu- institutions in the United States. nism, Nazism, and Anglo-Saxon liberalism. A second historical example is provided Todd argues that communism prevailed by Greif (1994), who analyzed the cultural in societies with communitarian families differences between medieval Maghribi (vertically authoritarian; horizontally egal- and Genoese traders. Maghribis held “col- itarian) because people were accustomed lectivist” Judeo-Muslim beliefs and norms, at home to the same authoritarian system which led them to develop different insti- adopted by government institutions. On the tutions from their “individualistic” Christian other hand, the absolute nuclear family of counterparts. The prevalence of collective England (liberal; nonegalitarian) was fertile relationships within a closely knit, exclusive ground for the development of nonegalitar- group implied for the Maghribis an informal ian capitalism, individualism, and market 918 Journal of Economic Literature, Vol. LIII (December 2015) freedom.46 Note the connection between ­investigated to discern interaction between Todd’s argument regarding the extended culture and institutions. The literature yields egalitarian family and the prevalence of a critical insight: trust can fundamentally communism with the “collectivist” society affect financial development. The main idea in Greif (1994). In both cases, a horizontal is that different levels of trust may imply dif- line (the clan in Greif, the communitarian ferent needs regarding investors’ protection family in Todd) interferes with the value of and other regulatory variables. Financial individualism, which brought about modern institutions cannot “cause” financial devel- forms of capitalism. Alesina and Glaeser opment if cultural variables work against it. (2004) also relate the lack of development The legal system can enforce financial con- of a communist party in the United States tracts, but without trust, it would be costly to with, among other things, the culture of involve courts in financial transactions. Thus, individualism and the views about poverty cultural values (especially trust) lead to the discussed above, similar to what proposed development of financial markets and mean- by Lipset and Marks (2001).47 ingful regulation. By analyzing these three experiences, we This argument is developed by Guiso, begin to glean the effect of culture on insti- Sapienza, and Zingales (2004, 2008a, 2008b) tutions from a historical perspective. Several in their examination of the role of trust recent papers have pushed the historical in determining attitudes toward financial analysis forward, undertaking more formal transactions and the development of finan- tests of the impact of culture on institutions. cial markets—in short, the “financial depth” We review these papers below. of a country. These papers provide a range of insights. First, trust is strongly related to The Impact of Culture on Financial how people invest and participate in finan- Institutions: Finance has been widely cial markets. The variation is large within the same legal system; in fact, they analyze 46 Todd’s theory has never been tested formally and within-country variation. For instance, use of perhaps suffers from anthropological determinism. The lit- cash, participation in the stock market, and erature on the diffusion of communism, is certainly more use of bank loans versus loans from friends complex. Pipes (1994) had a different view on the popu- larity of Communism in the Soviet Union. His view was are all variables that affect the financial struc- that the October Revolution was, rather than a popular ture of a country, and these authors show general uprising, a coup foisted upon the Russian popula- that cultural values affect it much more than tion by a small number of intellectuals, which established a one-party dictatorship that was repressive from the start. “standard” variables such as . Similarly, Figes’ (1989) view is that younger and more lit- The authors also assert that, at the mac- erate peasants and migrant townsmen were the ones who roeconomic level, taking cultural values into became the rural bureaucrats of the Bolshevik regime. This view, however, is controversial. A series of scholars, under account could shed light on several puzzles the influence of the French Annales School, has instead in finance. For instance, stock-market partic- sustained the interpretation that the Russian Revolution ipation is higher in countries with a higher was a movement from below. Note, however, that some similarity exists between Pipes and Todd. Pipes also argued level of trust; differing levels of trust could in favor of the totalitarian school, which sees the Third therefore explain low participation rates Reich, the Soviet Union, and Fascist Italy as totalitarian in various countries. Also, they find that regimes united by their antipathy toward democracy. In Todd’s view, there is also some similarity among totalitarian trust is much higher among citizens of the regimes, whose ideologies are compatible with an authori- same country; thus, investors hold a higher tarian structure of the family. percentage of domestic assets than they 47 In a similar vein, Sombart (1976) discusses reasons for the lack of a successful communist party in the United “should,” based on pure theories of portfolio States. diversification. They also show that a ­bilateral Alesina and Giuliano: Culture and Institutions 919 matrix of trust across countries explains a They also show an additional supporting remarkable amount of cross-border holding piece of evidence: the correlation of bilateral of equities and foreign direct . trust and trade is strong for differentiated How does this work relate to La Porta et products and absent for standardized ones, al.’s (1997, 1998) emphasis on legal institu- like oil. Mutual trust is in fact more likely to tions as determinants of financial develop- be relevant only in markets where quality ment? Perhaps this is an example of what control, tastes, and diffusion of information Greif defines as the social equilibrium are more important relative to a standard- including a combination of legal institutions ized market. and cultural variables. The interaction of certain legal origins (Anglo-Saxon ones) and The Impact of Culture on Formal Legal a high level of trust in those countries (as dis- Institutions: Licht, Goldschmidt, and cussed above) lead to financial development. Schwartz (2005) study whether laws on Guiso, Sapienza, and Zingales (2004) also the books in different societies reflect the show that differences in bilateral trust across prevailing national culture. They find that pairs of countries have strong explanatory national scores of cultural value dimensions power in a standard gravity equation for correlate with indices of shareholder voting trade flows. This correlation is robust to the rights and of creditor rights. In particular, inclusion of legal origins and institutions.48 they find that a national culture that pro- Obviously, issues of reverse causation are a motes assertiveness in reconciling conflict- first-order problem here. Bilateral trade may ing interests and that promotes tolerance for increase bilateral trust, rather than the other the resulting uncertainty is consistent with way around. The authors address this issue using litigation to deal with economic con- using instrumental variables. As an instru- flicts.50 The authors also show that correla- ment for trust, they use commonality of reli- tions between culture and legal rules hold gion and a measure of somatic distance.49 regardless of other major characteristics of countries; that they are not due to a reverse

48 Differences in the legal system could originate, in turn, from differences in cultural values, such as reli- gious beliefs. Kuran (2005) shows that Islamic inheritance 50 Culture is measured using data from Schwartz (1992) laws were an obstacle to the formation of the modern and Hofstede (2001). The authors test two hypotheses: (1) corporation, as emerged in Italy during the Renaissance. Greater reliance on concrete legal rules enforceable in the Community building was central to Islam’s mission. At the courts is stronger in nations high on the Schwartz cultural birth of Islam, the Arabian Peninsula was divided into tribes orientation of mastery (which emphasizes assertiveness, bound together by blood ties. The strong bonds within venturing, and active determination of one’s destiny) and one’s own tribe implied that intertribal alliances formed low on his harmony orientation (which opposes head-on for defensive purposes were inherently unstable, fostering confrontation and should therefore discourage embody- insecurity and retarding wealth creation. Islam responded ing economic interests in strict legal form and enforcing to this broad need by promoting communal bonds based them in court). These cultural emphases are compatible on religion, rather than descent. The formation of these with empowering investors and encouraging them to fight communal bonds was guaranteed by the presence of the for their rights. (2) Investors’ legal rights are stronger in wars, a type of unincorporated trust. The reason for such nations high on the Hofstede individualism dimension and an institution was based on the need to have an institution low on his uncertainty avoidance dimension. Individualism based on an individual instead of one involving self-gover- (versus collectivism) legitimizes the pursuit of personal nance by an organized group (like corporations during the interests, rather than deference to others’ decisions and Renaissance, for example). interests. Uncertainty avoidance affects the way power 49 The measure of somatic distance is based on the in organizations is exercised. High uncertainty avoidance average frequency of three specific traits in the indigenous is consistent with empowering authorities who control, population, taken by Biasutti (1954): height, hair color whereas low uncertainty avoidance is compatible with cor- (pigmentation), and cephalic index (the ratio of the length porate constituencies ready to challenge one another with and width of the skull). indeterminate outcomes. 920 Journal of Economic Literature, Vol. LIII (December 2015) causal impact of legal rules on culture51; and ­better framework than cross-country regres- that they persist in the face of formal legal sions for evaluating their interaction. reforms. As a result, national culture may impede reforms and induce path dependence The Impact of Culture on Democracy: in corporate governance systems.52 Understanding the underlying causes of Murrell and Schmidt (2011), in studying democratization is one of the key questions in seventeenth-century England, constructed social science. Lipset (1959) emphasized the annual data on cultural dynamics and insti- importance of economic development. As a tutional development. To construct mea- result, most of the empirical literature has sures on institutions, they used reports on focused on this specific determinant; how- ­eighteenth-century court decisions that ever, it finds the relationship between devel- cite the statutes and earlier cases used by opment and democracy mostly a feature of judges to support decisions and by lawyers cross-sectional data, and when performing to litigate. The cultural variable reflects data panel data analysis, the correlation disap- on word usage in a catalog of publications peared (see Acemoglu et al. 2008). Almond (books, pamphlets) from the seventeenth and Verba (1963) were the first to attempt to century, the English Short Title Catalogue. quantify the relevance of culture for democ- The authors capture the diffusion of the racy. They interviewed a sample of 1,000 Whigs—who emphasized the virtues of free- people in five countries (the United States, dom and sought to limit the powers of the Mexico, Great Britain, Germany, and Italy) monarchy—by tracing patterns in the use and defined a measure of political attitudes.53 of words emblematic of that culture. The They argued that political culture is crucial authors then use a vector error correction to the operation of any political system. The model, which relates changes in culture and study had several limitations, including a institutions to each other and to deviations small sample size, a limited set of countries, of each from their long-run relationship. and no discussion of reverse causality. The main finding is that cultural diffusion More recently, Gorodnichenko and Roland spurs the development of case and statutory (2013a) studied the importance of culture as a law. Although the choice of cultural vari- determinant of democratization. The authors able could be problematic—reporting words construct a simple model of ­democratization that are emblematic to the Whigs could be that includes individualist­ and collectivist endogenous—the exercise is very - ing, one of the few that features a time series of both culture and institutions, a much 53 Political culture is made up of cognitive, affective, and evaluative orientations toward the political system. They identify three types of political cultures: (1) parochial, in 51 The authors use episodes of British rule as an instru- which no clear differentiation of specific political roles and ment for culture. The exclusion restriction is problematic expectations exists among actors, i.e., “political specializa- for this case, as being ruled by Britain could have affected tion is minimal”; (2) subject, in which institutional and role many outcomes, including the law. differentiation exists in political life, but toward which the 52 Stulz and Williamson (2003) also show that culture citizen stands in largely passive relations; and (3) partici- matters for investor rights. They used countries’ pre- pant, in which the relationship between specialized insti- dominant religion and language as proxies for culture. In tutions and citizen opinion and activity is interactive. They particular, they show that religion is important for creditor summarize this general schema as follows: “A participant rights, but not for shareholder rights. Further, language is assumed to be aware of and informed about the polit- and religion are important for enforcement of rights. They ical system in both its governmental and political aspects. also show that culture and legal origin affect different A subject tends to be cognitively oriented primarily to the aspects of financial development, finding that stock-market side of government: the executive, bureaucracy, and development depends on a country’s legal origin, whereas judiciary. The parochial tends to be unaware, or only dimly debt markets and banking development depend on culture. aware, of the political system in all its aspects.” Alesina and Giuliano: Culture and Institutions 921

­cultures. They show that countries with a more politicians who pursue vested interests and , despite potentially grab rents for specific groups. In contrast, being less able to overcome collective-action uncivic agents vote based on their own or problems, are more likely to adopt democ- group-specific interests and are more tol- racy faster than countries with a collectivistic erant of amoral politicians. Nannicini et al. culture. Empirically, they show that there is (2013) convincingly test the prediction of a strong causal effect from individualistic cul- their model by using cross-district variation tures to average polity scores, controlling for in the criminal prosecution of Italy’s parlia- other determinants of democracy. To estab- ment members, who, they find, are much lish causality, the authors use (alternatively or less frequently reelected in districts with together) two instrumental variables: a mea- higher social capital. These results confirm sure of genetic distance between countries (as the intuition by Banfield (1958). In his study a proxy for vertical, ­parent-to-child cultural of a village in Southern Italy, he argued that transmission) and a measure of historical the lack of social capital made villagers unin- pathogen prevalence (this should have pushed terested in checking up on self-interested communities to adopt more collectivist val- politicians. In fact, these checkups constitute ues emphasizing tradition and less openness a public good, which like any other is under- to foreigners). The idea that individualism supplied when social capital is low. and collectivism can affect the functioning of Well-functioning political institutions also democracy is plausible; in a companion paper, need citizens who are interested in and par- however, the authors also show that individ- ticipate in politics, including voting at least ualism is crucial for economic development. occasionally, engaging in time-consuming Given the possibility that the instrumental activities, and staying informed. Alesina and variables don’t satisfy the exclusion restric- Giuliano (2011b) show that strong family ties tion, some doubts remain on the causality are negatively correlated with political par- from culture to democratization. In addition ticipation. Once again, this is consistent with to omitted variables, reverse causality could the argument by Banfield (1958). also be a concern, as people who live in a 3.2 From Formal Institutions to Culture democratic regime could be more inclined to embrace individualist values. The impact of exogenous institutional Cultural variables have been proven changes and shocks on culture: To isolate the to be relevant not only for establishing a effect of formal institutions on culture, one democracy but also for its functioning.54 needs to identify institutional changes that are Nannicini et al. (2013) show that in localities reasonably exogenous to cultural evolution. with a higher level of social capital,55 cit- Empirically, the effect of formal institutions izens are more likely to hold politicians on culture has been isolated in various ways. ­accountable for the aggregate social wel- One possible source of institutional change fare of the community. They will punish for which we have data is the advent and fall of communism in Central and Eastern Europe. Roland (2004) argues that the cul- 54 Glaeser, Ponzetto, and Shleifer (2007) argue that ture of these countries has changed little as human capital is another precondition for democratic insti- tutions to work. a result of communism. He documents that 55 They follow Guiso, Sapienza, and Zingales (2011), cross-country comparisons of various views as defining social capital as civic capital, “those persistent captured by the WVS do not change that much and shared beliefs and values that help a group overcome the free rider problem in the pursuit of socially valuable across countries as a result of communism: activities.” specific values and beliefs existed in these 922 Journal of Economic Literature, Vol. LIII (December 2015) countries before the transition, and they hardly ex ante uniform,57 these authors explore, changed afterward. They encompassed a more using German opinion surveys after reuni- authoritarian view of government and a pref- fication, the effect of fifty years of commu- erence for more government responsibility nism on Germans’ beliefs and preferences, over the economy. Moreover, these values and focusing on people’s views about the role beliefs do not appear to have converged of the state in the economy and in provid- toward those existing in advanced democra- ing services and social insurance. They cies and market , be it the EU–15 find that East Germans after reunification or the United States. Roland’s idea is that remain more progovernment than West institutional evolution in these regions seems Germans, possibly as a result of indoctrina- to follow a long-run path shaped in large part tion or more simply because they had gotten by a country’s long-run history. In contrast, used to an intrusive government.58 Alesina the recent history of communism seems to and Fuchs-Schündeln­ (2007) show that the leave fewer traces than its long-run history. of preferences between former Shiller et al. (1992) exploited the collapse East Germans and West Germans is pro- of the Soviet Union and East Germany to ceeding relatively quickly and might be com- explore the potential impact of socialism on plete in two generations.59 individual attitudes. By using surveys on six countries, they found little evidence of the so-called “Homo sovieticus.” 56 57 The authors tested for systematic differences along various dimensions. To test whether the two regions were Both studies, though providing an intrigu- similar in terms of income, the authors analyzed the aver- ing hypothesis, suffer from several lim- age per capita incomes of different German regions, as itations. The sample size is not so large well as subregions of Prussia, in 1928, 1932, and 1936. The authors found no significant difference. To control (especially with Shiller); in addition, we think for the possibility that Prussians might have had different the authors could have better attempted to beliefs, they include a dummy for being under the Prussian test for age cohort effects and geographi- empire (part of former Prussia belonged to the Federal Republic of Germany and part to the German Democratic cal differences to verify more convincingly Republic). At the dawn of the twentieth century, the areas whether living under a communist regime that became East and West Germany were also quite sim- permanently affected attitudes. Indeed, ilar along many economic dimensions, including the per- centage of the population working in industry, agriculture, different results emerge when a more strin- or commerce. In the elections of 1899, finally, around the gent identification strategy (Alesina and same number of constituencies in both areas voted primar- ­Fuchs-Schündeln 2007) is adopted. The ily in favor of the Social Democrats. If anything, the West was more in favor of state intervention than the East. authors use two vastly exogenous events to 58 Obviously, the authors control for the fact that for- the preferences of Germans: separation due mer East Germans may be more progovernment than for- to a military defeat (and the border deter- mer West Germans simply because they are, on average, poorer. mined by postwar agreements between 59 Paul Hollander (1999) had a different interpretation the Allies) and reunification due to the col- for the decline of communism, according to which the lapse of the Soviet Union. Taking advantage causality runs in the opposite direction. He documents a change in beliefs among leaders and political elites, using of the fact that before the separation, the a case study method, consisting of analyzing the life sto- inhabitants of East and West Germany were ries of twenty-two Soviet and East European Communists, including early defectors, leaders, and functionaries. In particular, he notes a change in the ideology of the elite, “their loss of political will, intertwined with their eroding 56 The authors study three former communist coun- sense of legitimacy, [. . .] appears to be the crucial factor in tries (Russia, Ukraine, and Eastern Germany) and three unraveling of the communist systems.” It is unclear whether advanced capitalist economies, the United States, Japan, this limited evidence can sustain the book’s broader argu- and Western Germany. Their sample consists of 2,670 ment. For one thing, the group he examined can hardly be interviews. taken as representative of the Soviet elite as a whole. Alesina and Giuliano: Culture and Institutions 923

Overall, the results on the advent and fall of social trust of the locations’ citizens today.61 Communism in Central and Eastern Europe Peisakhin (2010) surveyed 1,675 people liv- appear to be mixed, with earlier studies find- ing in 227 villages located within twenty-five­ ing no effect. We believe this may be due to kilometers of the Habsburg–Russian bor- small sample sizes and the inability to control der that divided Ukraine between 1772 and for age-cohort effects and geographical char- 1918. Relying on information on cultural acteristics; Alesina and Fuchs-Schündeln traits based on answers to survey questions, (2007) show more convincingly that living Peisakhin (2010) documents a wide range of under the communist regime had strong statistically significant cultural differences effects on people’s attitudes. between the two groups. A second set of papers isolates the relevance An interesting example of how a political of formal institutions by looking at countries shock could shape religious differences is ana- belonging to different historical empires. lyzed by Botticini and Eckstein (2005, 2007). Several empirical strategies were employed The authors link Jewish population dynam- to isolate the importance of empires. ics, educational and occupation choices, Becker et al. (2011) focus on the conversion, and migration to the same epi- Hapsburg Austrian Empire, known for its sode: the destruction of the Second Temple ­well-functioning, well-respected bureau- in the first century. Before the destruction of cracy, at least when compared to other the temple, the two main groups were the empires in Eastern Europe, such as the Sadducees, who accepted only the written Ottoman and Russian Empires. This regime Torah and adopted the Hellenistic culture, created trust in government institutions by and the Pharisees, who aimed to expand the developing modern state institutions and study of both the written Torah and oral Torah enforcing the rule of law. To test whether among all Jews and opposed the expansion of confidence in institutions persists today, the Greek language and culture. When the tem- authors compare people living in commu- ple was destroyed, the Pharisees became the nities located within 200 kilometers of each dominant group. They replaced sacrifices, other on either side of the Habsburg border, which could only be performed in the tem- exploiting the geographical discontinuity ple, with the study of the Torah in the syna- created in Eastern Europe by the Habsburg gogues, whose main function was to provide Empire. In order to avoid capturing unob- religious instruction to children and adults. served country heterogeneity, they use The authors show that the norm requiring country fixed effects to restrict the analysis Jewish fathers to educate their sons deter- to variation within individual ­modern-day mined several major patterns in Jewish his- countries.60 Though they find some effect on tory: on the one hand, Jewish farmers who various measures of trust toward the govern- invested in education gained a comparative ment, not all measures of trust show signifi- advantage and the incentive to enter urban cant differences, so the results are interesting skilled occupations during the vast urbaniza- but inconclusive. tion in the newly developed Muslim empire. Grosjean (2011) examines location pairs This was also at the origin of the voluntary within Eastern Europe and shows that the diaspora of the Jews in search of worldwide longer a pair was under the same empire opportunities in crafts, trade, and money historically, the more similar the reported

61 The data include 21,000 households in 1,050 primar- 60 The Habsburg border cuts through five countries ily sampling unit. The relevant empires in her sample are today: Montenegro, Poland, Romania, Serbia, and Ukraine. the Ottoman, Austro-Hungarian, Russian, and Prussian. 924 Journal of Economic Literature, Vol. LIII (December 2015) lending. At the same time, the shock also over a thousand children and adults who implied a slow process of conversion from were differentially affected by war in Judaism among illiterate Jewish farmers who both the Republic of Georgia and Sierra lived in subsistence economies: according to Leone. The authors show that exposure to the authors, between 30 percent and 60 per- ­conflict-related violence between the ages of cent (depending on location) of the Jewish seven and twenty shifts people’s motivations population, decided to leave Judaism and to greater equality for in-group members. convert to other religions, mainly Christianity. Overall, their results suggest that psycho- Most Jewish converts to Christianity were logical reactions triggered by war during a uneducated and low income. particular developmental window generate Overall, an initial shock implied the dif- more in-group-oriented­ egalitarian motiva- fusion of a costly religious norm requiring tions. Other studies use behavioral games fathers to educate their sons. This norm, in to link war and social motivations; in one, an turn, could not survive in the long run in sub- ultimatum game conducted before, during, sistence farming economies, where literacy and after the Israel–Hezbollah conflict did not increase earnings, and could instead demonstrates that living in a society under survive only in those places where Jewish an active, ongoing external threat temporar- people could find occupations in which ily increases the willingness of senior citizens their earnings rose significantly from liter- to punish noncooperators and reward coop- acy. The paper provides an interesting his- eration (Gneezy and Fessler 2012). Voors et torical reconstruction of how an initial shock al. (2012) reveal that in Burundi, people who affected religious norms and how this change have experienced war-related violence share in turn had long-term economic effects. more with their neighbors.62 Wars and economic shocks can also Giuliano and Spilimbergo (2014) look shape values and beliefs. The research into at how the experience of macroeconomic war’s effect on attitudes has explored how shocks when young affects beliefs regarding a recent history of violence could shape the role of luck versus effort as a determinant norms of fairness. Whitt and Wilson (2007), of economic success, as well as preferences for example, in looking at how people treat for redistribution and political behavior. The their in-group and their out-group, observe authors show that individuals who grew up how much money people send in a dictator during a tend to support greater game to an anonymous but ethnically iden- government redistribution, believe that luck tifiable counterpart. The sample comprises is more relevant than effort in determining 681 Muslims, Croats, and Serbs in postwar economic success in life, and vote more for ­Bosnia–Herzegovina. The results indicate left-wing parties.63 that a norm of fairness persists, despite pref- The authors combine evidence from three erential in-group treatment and a distinct data sources. First, they identify the effect out-group effect. In a similar vein, Bauer of on beliefs, exploiting time et al. (2011) test the specific prediction that and regional variation in macroeconomic the experience of intergroup conflict shifts individual psychological motivations to 62 Acemoglu et al. (2011) study the effect of the favor in-group egalitarianism. The authors Napoleonic conquest on the institutions of the regions that administered a series of ­social-choice tasks, fell under French domination. This paper, however, does designed to isolate in-group ­egalitarian not investigate cultural effects. 63 Malmendier and Nagel (2011) show that recessions motivations from selfish­ or generalized make people more risk-averse and lower their propensity egalitarian and altruistic motivations, to to invest in the stock market. Alesina and Giuliano: Culture and Institutions 925

­conditions using data from the 1972–2010 with and without punishment opportunities General Social Survey, which allows them to in sixteen cities (which should be a proxy for control for nonlinear time-period, life-cycle,­ a different institutional environment). They and cohort effects, as well as a host of back- find that cooperation and antisocial punish- ground variables. Second, they use longi- ment is highest in Boston and Melbourne tudinal evidence drawn from the National and lowest in Athens and Muscat. The order Longitudinal Survey of the High School is highly correlated with the rule of law and Class of 1972 (NLS72) to corroborate the the transparency of institutions in the corre- ­age-period-cohort specification and look sponding country. at heterogeneous effects of experiencing a All these papers are consistent with the recession during early adulthood. Finally, argument that people internalize social they confirm their findings with a sample of norms that emerge from specific circum- thirty-seven countries whose citizens experi- stances (war, economic shocks) or specific enced macroeconomic disasters at different needs (the fishermen in Brazil), and support points in history, using data from the WVS. the idea that differences in the institutional environment play a decisive role in the prev- Experimental Evidence: An alternative alence of various types of norms. approach for identifying the effect of insti- A more sophisticated class of experi- tutions on culture is to observe in laboratory ments involves manipulation of formal experiments how people behave in different rules. Compared to the simpler approach of institutional settings. In their seminal work, observing people in a different institutional Henrich et al. (2001) study fifteen small, pre- environment, this approach allows for a con- industrial societies and show that group-level trolled experiment to estimate how people differences in economic organization and the change their culture depending on exoge- degree of market integration explain much nous variation in the rules of the games. of the behavioral variation across societies: A set of experiments on the impact of the higher the degree of market integration democratic rules on behavior (Tyran and and the higher the payoffs of cooperation, Feld 2006; Ertan, Page, and Putterman the greater the level of cooperation in exper- 2010; and Sutter, Haigner, and Kocher imental games. Gneezy, Leibbrandt, and List 2010) find that punishment and rewards in (forthcoming) look at the evolution of trust, public-goods games have a greater impact cooperation, and coordination in different on behavior when they are allowed dem- Brazilian fishing villages. In villages located ocratically. The concern with these sets of by the sea, fishermen work in teams; in vil- experiments is selection: even if groups are lages located around a nearby lake, fishing is formed randomly, groups choosing a partic- an individual activity. Fishermen from both ular policy could still have different pref- societies took part in seven experiments: a erences than those that don’t choose that trust game, an ultimatum game, a donation policy. Dal Bo, Foster, and Putterman (2010) game, a lottery game, a public-goods game, a solve the problem of selection by studying coordination game, and a game. whether the effect of a policy depends on The authors find that the sea fishermen trust whether it is imposed endogenously or exog- and cooperate more and are more able to enously. The authors design a laboratory coordinate group actions than their lake fish- experiment to study how democracy affects ermen counterparts. cooperation. In particular, they are able to Herrmann, Thoni, and Gachter (2008) distinguish how cooperation changes when conducted large-scale cooperation games a policy is imposed ­endogenously through 926 Journal of Economic Literature, Vol. LIII (December 2015) a democratic process or imposed exoge- Bardhan (2000) finds that farmers are less nously. In the study, subjects participate in likely to violate irrigation rules when they several prisoners’ dilemma games and may themselves have crafted those rules. Frey choose, by simple majority, to establish a (1998) finds that Swiss cantons with greater policy that could encourage cooperation by democratic participation face lower tax eva- imposing fines on noncooperators. In some sion. Levine and Tyson (1990), Bonin, Jones, cases, the experimental software randomly and Putterman (1993), and Black and Lynch overrides the subjects’ votes and imposes (2001) find that worker participation in the policy. Before proceeding to play again workplace decisions may boost productiv- with either the original or the modified pay- ity. Several issues with the above-mentioned­ offs, the subjects are informed of whether evidence could arise: societies or groups payoffs are modified and whether it was with democratic institutions may differ from decided by their vote or by the computer. societies or groups without those institutions­ The authors show that the effect of the pol- (Swiss cantons with great democratic par- icy on the percentage of cooperative actions ticipation may differ from cantons with is 40 percent greater when the policy is low democratic participation because of democratically chosen by the subjects than other differences, for example, civic capi- when it’s imposed by the computer. tal). Second, democratic societies or groups The drawback of the experimental litera- may choose different institutions or poli- ture is its external validity, as formal rules in cies. Finally, there is a selection into policy, experimental games differ from real-world since democratic choice allows groups with institutions. This concern is common to all different characteristics to choose different experimental literature, but in some cases— policies. Experiments allow researchers to for example, testing the existence of complex circumvent these threats to identification. social interactions in a small group as a proxy for large real-world societies—the problem Culture and the Market: Bowles (1998) of external validity is more difficult to over- emphasizes the role of the fundamental eco- come. Dal Bo, Foster, and Putterman (2010), nomic institution, the market, in the forma- consistent with this view, argue that, though tion of preferences/culture. He develops a the extent to which their results apply to model in which the basic intuition is that the state- or national-level democratic processes distribution of cultural traits in a population is unclear, the results may still be useful is determined as the equilibrium of a system in understanding democratic processes in whose exogenous elements are subject to the small settings, such as villages in low-income long-term influence of markets and other countries, or in understanding the effects economic institutions. Economic institutions of worker participation in firms, and the affect the evolution of preferences by chang- design of procedures in small groups such ing these exogenous determinants of the cul- as academic departments. (For example, the tural equilibrium. effects of a policy to monitor schoolteachers’ Bowles’ main conclusion is that economic attendance that arise when the policy is ran- institutions (i.e., the market) may affect domly allocated across schools may be quite preferences through five different channels: different from the effects of a policy chosen their direct influence on situational con- in part by teachers in each school.) strual, forms of rewards, the evolution of Other research in a nonexperimental set- norms, task-related learning, and their indi- ting supports the notion that democratic rect effects on cultural transmission itself. institutions may affect cooperative ­behavior. He concludes that “the production and Alesina and Giuliano: Culture and Institutions 927

­distribution of goods and services in any soci- activity on Sunday. Many states have repealed ety is organized by a set of rules, among which these laws in recent years, raising the oppor- are allocation by fiat in states, firms, and tunity cost of religious participation. The other organizations. . . . Particular combi- authors show that when a state repeals its nations of these rules give entire societies blue laws, religious attendance falls, as do modifiers such as ‘capitalist,’ ‘traditional,’ church donations and spending. Repealing ‘communist’. . . . One risks banality, not the laws may not be an exogenous event; in controversy, in suggesting that these alloca- addition, declining levels of religiosity may tion rules therefore influence the process of have led to the laws being repealed, rather human development, affecting personality, than the other way around. The authors habits, tastes, identities, and values.” Further, address these concerns by including several he states, “the argument that economic insti- controls for a state’s socioeconomic circum- tutions influence motivations and values is stances. In addition, they do a placebo exer- plausible, and the amount of evidence con- cise by including a dummy for the two years sistent with the hypothesis is impressive.” before the ­blue-law repeal. The dummy is In particular, several ethnographic and his- insignificant. As a further test, the authors torical studies recount the impact of mod- note that if omitted factors drive down reli- ern economic institutions on traditional or gious participation, they are also likely to indigenous cultures. (See Bowles 1998, for a reduce participation in other group activi- review of these studies.) He also argues that ties. The authors find that whereas ­blue-law the rise of feminist values, the reduction in repeals do lower ­church-group membership, family size, and the transformation of sex- they exert no effect on the probability of ual practices coincided with the extension of being a member of any other group. women’s labor-force participation. Di Tella, Galiant, and Schargrodsky (2007) This last point has been more formally conduct an experiment among squatters in developed by Fernandez (2013) and Fogli Buenos Aires who randomly received land and Veldkamp (2011), who show how women titles. The authors show that receiving land learn about the long-run payoffs from work- titles changes a wide range of beliefs and val- ing by observing nearby employed women. ues (such as individualism, the role of merit, Culture would then quickly evolve over time and trust). Another interesting example is as a result of this process: when few women a study done by Kohn et al. (1990) over a participate in the market, information is period of three decades. The authors, using scarce and participation rises slowly. As infor- evidence from Japan, the United States, and mation accumulates, the effect of maternal Poland based on a sample of male employees, employment becomes less uncertain and show that men who are more advantageously female labor-force participation increases. located in the class structure of their society are more likely to value self-direction and Regulation and Culture: Regulations are independence for their children, intellec- institutional characteristics that could shape tual flexibility, and personal self-directness. differences in values. Gruber and Hungerman These results are not driven by selection. In (2008) study the effect of changes in regula- a series of related studies, longitudinal data tion (shopping hours) on religious practices provide instruments to address the question (church attendance). The authors identify a of reciprocal causation, leading to evidence policy-driven change in the of a substantial casual effect of occupation- of religious participation based on changes ally determined values on other people’s val- in “blue laws,” state laws that prohibit retail ues, orientation, and cognitive functioning. 928 Journal of Economic Literature, Vol. LIII (December 2015)

In summary, the arguments about the common is their analysis of the two-way rela- effects of institutions on culture rely on tionship. This interdependence generates, in experimental evidence and on historical nat- all models, multiple stable equilibria, with ural experiments where institutions vary in different sets of self-reinforcing institutions locations with common geographical, cul- and cultural norms. This coevolutionary tural, and other socioeconomic character- structure has been applied to several cultural istics. Both methods are convincing, with traits: cooperation, trust, family ties, individ- some caveats. Experimental evidence might ualism, and fairness. be difficult to generalize outside the lab- oratory; or at least similar conclusions can The Coevolution of Cooperation and be drawn for specific real-world situations Formal Institutions: Tabellini (2008b) (see the comment on Dal Bo, Foster, and provides a formal model of the interplay Putterman 2010, above). If one wants to play between culture and legal institutions, which devil’s advocate, even the identification of the enforce contracts.64 The model has three natural experiment as a change in institution ingredients: (1) two potential cultural traits could be debatable, as institutions generally (generalized versus limited morality), one reflect the cultural attitudes of the institution of which values cooperation more than the builders (as discussed for Fischer 1989). other: cooperation between the immediate In the next section, we discuss a more family and the clan (limited morality) is rel- promising line of research that doesn’t try to atively easy to sustain; cooperation among identify a single cause but rather looks at the distant (i.e., less connected) players (gener- interactions between culture and institutions. alized morality) is more difficult to sustain. People face moral costs if they don’t cooper- 3.3 The Interaction between Culture ate in a prisoners’ dilemma game, even when and Formal Institutions the game is played only once. These costs The most promising approach, both the- decrease as the distance between players oretically and empirically, to studying the grows; (2) a mechanism of vertical cultural interaction between culture and institutions transmission of values, with parents exerting recognizes and embraces a two-way effect costly effort to instill cooperation; (3) for- to explain economic development and other mal institutions (which enforce cooperation) types of economic outcomes, rather than endogenized through majority voting. stressing causality in one direction or the The larger the share of cooperative play- other. Recent contributions have looked at ers, the more it is in everybody’s interest the coevolution of culture and institutions, to cooperate and the more parents will leading to multiple equilibria character- teach children to cooperate. This kind of ized by a combination of some types of cul- complementarity gives rise to the possibil- ture and some types of formal institutions. ity of multiple equilibria, one with limited The general idea underlying this approach morality and one with generalized moral- is that a country (or a region or an ethnic ity. Well-functioning legal institutions may group, for example) shares certain cultural increase both the cost of noncooperation values, which leads to the choice of certain and the number of cooperative players. This ­institutions. In turn, certain institutions lead effect, combined with the ­complementarity to the survival (and transmission across gen- erations) of certain cultural values. 64 Tabellini (2008b) builds on Dixit (2004) and also on Below, we describe various papers that Bisin and Verdier (2001) for the model of intergenerational explore this interaction. What they have in transmission of values. Alesina and Giuliano: Culture and Institutions 929 described above, may switch a society from cooperative behavior. Whether the examples an equilibrium with limited morality to one of leadership leading quickly to generalized with generalized morality. On the other trust are the exception or the rule remains hand, with generalized morality the need for to be seen. Guiso, Sapienza, and Zingales institutional interventions to punish cheating (2013) provide convincing empirical evi- is less frequent, leading to better-functioning­ dence of the long-term persistence (over institutions and reduced caseloads. Good several centuries) of cooperation and trust in institutions and generalized morality are Italy, spanning numerous political regimes, therefore self-reinforcing. Good institu- leading to the different functioning of mod- tions foster generalized morality, reducing ern political institutions.66 legal caseloads and court crowding. Poor The interaction of culture and institutions ­institutions do the opposite, decreasing has also been studied using ­cultural-evolution morality and making people more litigious, models (see Bowles and Gintis 2010). The cluttering the legal system. Tabellini’s paper authors define culture as the set of prefer- also implies that globalization—in which ences and beliefs acquired by means other economic interactions are more and more than genetic transmission. What distin- common amongst distant players—makes guishes humans from animals is the way the need for good legal enforcement and we acquire information. For most animals, generalized morality even more important.65 genetic transmission and individual learn- Acemoglu and Jackson (2012) disagree in ing are the only means for acquiring infor- part, arguing that norms of cooperation may mation. Humans, by contrast, also acquire evolve quickly and sometimes respond to information through social learning. Social leaders or institutional changes. The motiva- learning, or cultural transmission, as opposed tion for their paper comes from the historical to individual learning, takes the forms of ver- observational differences in cultural, social, tical (parents to children), horizontal (peer and political behavior between Northern and to peer), and oblique (nonparental elder to Southern Italy. Whereas the literature has younger) transfer of information. emphasized that “amoral familism” and lack The authors use institutions to explain the of “generalized trust” are at the origin of the evolution of altruistic behavior over time. In “inability of the villagers to act together for particular, their idea is that group competi- their common good” (Banfield 1958), these tion and culturally transmitted group differ- differences are not set in stone. The authors ences in institutional structures are crucial refer to Locke (2002), who provides exam- in explaining the evolution of cooperative ples from the south of Italy and northeastern behavior among humans. Group differences Brazil, where starting from conditions sim- in institutional structures persist over long ilar to those emphasized by Banfield, trust periods due to the nature of institutions as and cooperation emerged at least in part as a “conventions”—common practices adhered result of “leadership” and certain specific pol- to by virtually all group members because icies. In addition to leadership by prominent the relevant behaviors are mutual best agents, social norms could also be affected by responses, conditioning on the expectation institutions or policies that encourage more of similar behaviors by most others. The conventional nature of institutions accounts for their long-term persistence and 65 Jackson (2013) extends the Tabellini model to a case of joint production. For a related model, in which law and morality can be substituted, see Bohnet, Frey, and Huck 66 Their work confirms the hypothesis of Putnam (1993) (2001). that we discussed in the introduction. 930 Journal of Economic Literature, Vol. LIII (December 2015) also their occasional rapid change under the The model, similarly to Tabellini (2008), has influence of shocks. In their model, when three elements: (1) Two cultural traits: being new members of the population mature or civic or being uncivic. People need to make immigrate, they adhere to the existing insti- two decisions, whether to become civic and tutions, not because of conformist learning whether to become entrepreneurs or choose but because this is a best response, as long some form of routine production (such as as most others do the same. In that sense, state production). Those who become uncivic institutions are group-level characteristics; impose a negative on others when successful institutions, like the European they become entrepreneurs (for example, by national states, produce many replicas, polluting), those who become civic do not. (2) while unsuccessful institutions disappear. A mechanism of cultural vertical transmis- Institutions may replicate when a successful sion according to which children are thought group grows or when a group with unsuccess- to become civic or uncivic by their parents. ful institutions succumbs to a military, ecolog- (3) A political mechanism (such as voting) that ical, or other challenge. The novelty of their allows the community to regulate entry into evolutionary approach is that institutions, entrepreneurial activity when the expected as individual characteristics, are subject to negative externalities are large. Regulation selection. For example, food sharing beyond constrains choices, hence negative external- the family, which reduces within-group­ dif- ities, but is at the same time implemented ferences in material well-being, attenuates by government officials, who demand bribes within-group selective pressures. Groups when they are uncivic. adopting institutions such as food sharing When people expect to live in a civic com- help proliferate group-beneficial­ individual munity, they expect low levels of regulation traits, including altruism. and corruption, and so become civic. When they expect to live in an uncivic community, The Coevolution of Culture and Regula­ they expect high levels of regulation and tion: Whereas Tabellini (2008b) has only corruption, and do not become civic. The a theoretical framework to explain the model has two equilibria: one with a large coevolution of culture and institutions, share of civic individuals and no regulation, three recent papers have also contained an and another in which a large share of uncivic empirical study of this interaction. Aghion individuals support heavy regulation. et al. (2010) look at the interaction between In the empirical part, the authors test sev- generalized trust and regulation. Aghion, eral predictions of the model; relevant for our Algan, and Cahuc (2011) examine contem- purposes are a negative correlation between porary labor markets and identify a negative trust and regulation and also between trust interaction between the existence of coop- and demand for regulation. The authors take erative labor relations and the severity of a the evidence on the demand for regulation as state-mandated minimum . Alesina et consistent with the link running from distrust al. (forthcoming) look at the positive rela- to regulation. To show that the other effect tionship between the strength of family ties is also present, from regulation to trust, they and the strength of labor-market regulation. examine the experiment of transition from Aghion et al. (2010) present a model and socialism, which was a radical reduction in provide empirical evidence to explain the government control in low-trust societies. coevolution of trust and regulation. In their Their model predicts that such a reduc- framework, trust is defined as beliefs resulting tion should lead to, among other things, from family decisions about civic-mindedness.­ an increase in the demand for government­ Alesina and Giuliano: Culture and Institutions 931

­control at a given level of trust and a reduction Aghion, Algan, and Cahuc (2011) also in trust in the short run. Their results hold have a model of interaction between regula- using three different datasets: the WVS, the tions and culture. The sequence of decisions International Social Survey Program (ISSP), in the model is as follows: the trade union and the Life in Transition Survey (LITS).67 decides whether to invest in the quality of The authors find consistent evidence that labor relations; people vote to elect a gov- distrust leads to support for government ernment that sets a minimum wage; work- regulation. Although the exercise uses ers decide whether to join the trade union; within-country variation—the authors can are set by employers for nonunionized therefore include country fixed effects—the workers and by wage negotiation for union- drawback of their empirical strategy is that ized workers. certain omitted variables could drive both In this framework, higher-minimum-wage the demand for regulation and distrust. For regulation reduces the benefits to workers the evidence regarding transition economies, of trying to cooperate with firms. There­ the drawback is that the end of communism fore, more stringent minimum-wage reg- could have caused other changes in addition ulations crowd out cooperation between to the liberalization of entrepreneurial activ- firms and workers. In turn, less cooperative ity that drives the change in trust.68 firm–worker relationships increase the demand for minimum-wage regulation. This interdependence explains the observed neg- 67 The WVS poses general questions concerning atti- tudes toward competition and state intervention. The ative relationship between the minimum ISSP contains specific questions on the regulation of wages wage and cooperative labor relations. and . The LITS provides evidence on twenty-eight To identify the effect of attitudes on post-Communist countries in Europe and Central Asia, and it has questions on preferences for market versus institutions, the authors use historical data planned economies. on state attitudes toward labor-market 68 Similar conclusions have been reached by Pinotti relations from Crouch (1993), who clas- (2012), Carlin, Dorobantu, and Viswanathan (2009), and Francois and Ypersele (2009). Pinotti (2012), looking at sifies states in three categories regarding the correlation between trust and regulation, shows that labor-market relations: (1) Four states that variations in entry regulations around the world mostly were hostile to the development of unions reflect demand pressures from people at large, as captured by differences in trust. His contribution, when compared and consequently prone to directly regu- to Aghion et al. (2011), is to address the implications of lating labor markets and settling disputes these findings for the cross-country pattern of trust, regula- through centralized decisions. This group tion, and market failures. He shows that, keeping constant the trust-driven component of demand for government consists of the main Catholic countries in intervention across countries, regulation is no longer asso- Europe, namely France, Italy, Spain, and ciated with worse economic outcomes. Carlin, Dorobantu, Portugal. In these countries, the central gov- and Viswanathan (2009) look at how trust evolves in the market, what the optimal level of government regulation ernment needed to establish its authority is, and how this intervention affects trust and economic over the Catholic Church and to confront growth. They show that when the value of social capital all forms of organized interests, including is high, government regulation and trustfulness are sub- stitutes. In this case, government intervention decreases worker organizations. (2) Seven countries economic growth. On the other hand, when the value where the state was neutral regarding labor of social capital is low, regulation and trust may be organizations: Belgium, Denmark, Norway, complements. Francois and Ypersele (2009), using data from the General Social Survey, found a strong positive Sweden, Finland, the United Kingdom, and relationship between individual trust and the competi- Ireland. (3) Countries where the state that tiveness of the sector in which an individual works. Their encouraged union involvement in the reg- idea is that competition mitigates incentives for free riding by imposing a costly shutdown on poor-performing firms, ulation of labor markets: Austria, Germany, making employees more trustworthy, which increases trust. the Netherlands, and Switzerland. 932 Journal of Economic Literature, Vol. LIII (December 2015)

The dependent variable of Aghion, Algan, and firing restrictions. Given the cultural and Cahuc’s (2011) specification is the qual- value placed on family ties, labor-market ity of labor relations in OECD countries in regulation is preferable to laissez-faire; even 2000 as a function of the attitudes of the though laissez-faire­ produces higher income state toward unions in the nineteenth cen- per capita, it rarefies family relations. If fam- tury. The authors find that attitudes affected ily ties are sufficiently strong, this relaxation institutions even after controlling for the of family relationships can reduce individual rate and other labor-market­ so much that welfare can be higher institutions (including replacement rate, with a regulated labor market. The authors benefit duration, employment protection, show how preferences for labor-market insti- and tax wedge). To establish the opposite tutions are strongly associated with family channel of the effect of institutions on atti- values, even within countries. tudes, the authors look at the impact of union The findings imply a two-way effect density in the home country in 1950 on the between family ties and labor-market regu- current unionization attitudes of first- and lation. An inherited culture of strong family second-generation immigrants in the United ties leads to a for labor-market States born after 1950. rigidity; the latter, in turn, makes it optimal to Alesina et al. (2015) study the interaction teach and adopt strong family ties. In fact, a between family ties and the regulation of regulated market creates unemployment and labor markets. The model has three different lower wages, and the family provides the nec- components: (1) a difference in cultural val- essary social insurance. In other words, the ues, specifically in the strength of family ties; benefits of a strong family enjoying the plea- (2) a mechanism of vertical cultural trans- sures of living together necessitate an inef- mission, in which people choose the strength ficient institution: labor-market regulations of family ties to transmit to their children; with firing costs and binding minimum wages. (3) a majority-vote political mechanism, Regulated labor markets survive despite their which allows people to choose the degree of obvious economic costs. Incidentally, this labor-market regulation. explains why in large parts of Europe where Flexible labor markets require that peo- family ties are stronger, labor-market dereg- ple move geographically to maximize their ulation is one of the most difficult reforms to opportunities, find the best match with implement. In Northern European countries, a firm, and get the best-paying job. This a “flex security” system has proven success- model is efficient when mobility is painless. ful: unemployment is lower and participation However, in societies with strong family in the labor force higher than in Southern ties, staying close to family is important, and Europe. In general, Southern European the mobility required by a free labor market countries rely much more on the family than can be painful. With unregulated labor mar- Northern European ones to provide social kets, local firms would have a monopolistic insurance for the unemployed. power over immobile workers, who would In their empirical section, the authors also demand labor regulation to counteract this show that culture is more primitive than insti- power. This can lead to two different equi- tutions by looking at the family values that libria. One is laissez-faire, with high mobility European descendants have inherited from and unregulated labor markets; this occurs forebears who migrated to the United States when family ties are weak. When family ties before 1940. They found a strong effect of are strong, the other equilibrium evinces culture in the determination of labor-market ­labor-market rigidity with minimum-wage institutions. Alesina and Giuliano: Culture and Institutions 933

The four studies have in common a sim- highlight the interaction between culture and ilar theoretical building block, consisting of institutions regarding fairness and redistribu- differences in the original cultural values, a tion. They develop a model in which income mechanism of vertical transmission, and a could derive from ability or luck. Voters, in political mechanism for choosing the type of addition to caring about their own income, dis- regulation. All the models provide a rationale like the notion of inequality due to luck rather for multiple equilibria in institutions and cul- than to effort and ability. Multiple equilibria tural values; countries with heterogeneous can occur. In one equilibrium, income taxes beliefs can end up in different equilibria; are high, effort low, the share of individual but also, as in Aghion et al. (2011), countries income due to luck is high, and desired taxes starting with the same beliefs in cooperation are high, since luck-generated inequality is can diverge and end up in different equilib- viewed negatively by voters. In the other equi- ria, depending on historical idiosyncrasies. librium, taxes are low, effort is high, the frac- Two of the papers (Aghion, Algan, and tion of income explained by luck is low, and Cahuc 2011; Alesina et al. 2015) empirically desired taxes are relatively low.70 The moti- adopt an identification strategy in which cul- vation was to capture a United States versus tural traits are measured in the past as a result Europe difference along the lines suggested of cultural transmission across generations. informally by Alesina, Glaeser, and Sacerdote These past cultural values are then used as (2001) and Alesina and Glaeser (2004).71 The main dependent variables for institutions that feedback here is from cultural values (views were created much more recently, thus lim- about poverty) to choice of certain redistrib- iting the issue of reverse causality. Of course, utive policies, which reinforce cultural values. the problem of omitted variables is not solved Extensive literature based on answers to sur- completely using this approach: a common veys (see the review by Alesina and Giuliano factor could have caused both persistence in 2011b) shows that people who believe that the specific cultural traits and development of poor are unfortunate are much more likely to specific institutions. Aghion et al. (2010) use support redistributive policies.72 the end of communism in Eastern Europe Alesina, Cozzi, and Mantovan (2012) as a natural experiment, but even in this case develop these ideas by tracing the evolution­ concerns remain that communism could have changed some other variables that also could have influenced institutions and cultural vari- 70 Benabou and Tirole (2006) present a different model that leads to similar conclusions, though based on different ables. Despite these limitations, we believe the behavioral assumptions. papers provide sufficient ­evidence of a feed- 71 Using happiness data, Alesina, Di Tella, and back effect between culture and institutions. MacCulloch (2004) show that Americans are less sensitive to inequality. 72 In the United States, race is important in explaining The culture of work and the redistributive redistribution. Lee and Roemer (2006) identify two mech- state: Models with multiplicity of equilibria anisms through which racism among American voters decreases the degree of redistribution. The first, which has have also been used to explain the relationship also been suggested by other authors (Alesina, Glaeser, and between the culture of work and the redis- Sacerdote 2001; Luttmer 2001), suggests that voter racism tributive state.69 Alesina and Angeletos (2005) decreases the degree of redistribution due to an antisoli- darity effect: voters oppose government transfer payments to minorities whom they view as undeserving. The second mechanism is that some voters who desire redistribution 69 In Piketty (1995), multiple equilibria in beliefs and nevertheless vote for the antiredistributive party (the redistributive policies can originate from the heterogeneity Republicans) because the party’s position on race issues is in initial beliefs and how hard it is for people to learn the more consonant with their own. They classify this effect as true costs and benefits of redistribution. the “policy bundle effect.” 934 Journal of Economic Literature, Vol. LIII (December 2015) over time of ideas of fairness, measured come from an initial heterogeneity in beliefs. inequality, and preferences for redistribu- In addition, shocks may lead to rapid changes tion. They show that long-lasting differences in attitudes. For instance, the cultural rev- in welfare policies result from initial cultural olution of the 1960s (this is not the place to differences about what is and isn’t fair about discuss its origins) generated a more favorable the initial level of inequality. Imagine a soci- attitude toward redistribution, even in the ety where “at the beginning,” wealth inequal- United States. Furthermore, the recent finan- ity was all due to birth, nobility, and the like. cial crisis, which exposed enormous wealth Compare it to another society where initial accumulated in the financial sector, may have wealth distribution was the result of effort, created an antimarket cultural shift, with the entrepreneurship, and so on. We can think associated rhetoric of the “top 1 percent.” of the former as Europe, where hundreds of years of feudal instructions created deeply Individualism and Institutions: rooted class divisions based on birth. We Gorodnichenko and Roland (2013a) test can think of the latter as the United States, empirically whether individualism causally where the initial distribution of wealth was affects institutions or vice versa. To test first much more the result of successes and fail- for a causal effect of individualism on insti- ures of entrepreneurs, and of new waves of tutions, the authors regress measures of immigrants. The United States never had institutions at the country level (given by the feudal institutions, and wealth inequality was protection against expropriation risk, also accepted as fairer than in Europe. Precisely used in Acemoglu, Johnson, and Robinson for this reason, the absence of preindustrial 2001), on the measure of individualism feudal institutions in the United States led taken by Hofstede (2001) and a series of Marx and Engels to doubt that communist controls for geography, a dummy for con- ideology would succeed there.73 tinents, and the percentages of population Alesina, Cozzi, and Mantovan (2012) practicing major religions. Individualism is show that these different initial conditions instrumented using a specific measure of at the birth of capitalism, due to different genetic markers, given by the Mahalanobis preindustrial institutions, led to ­long-lasting distance between the frequency of blood ­cultural differences regarding the perception types in a given country and the frequency of poverty, the need for extensive govern- of blood types in the United States (the ment intervention, and the (lack of) respect most individualistic­ country in their sample). for the wealthy. These early differences in Here’s the idea behind the instrument: to cultural values still strongly influence policy the extent that culture is transmitted mainly choices today. These beliefs have become from parents to children, so are genes.74 In ­self-sustaining: the more wealth is redistrib- ­addition, when the authors use genetic dis- uted via government intervention, the less tance as an instrumental variable, they don’t some people see it as fair, because it is not postulate a causal relationship between genes the market but rather politicians, special and cultural attributes such as individualism; interests, and various pressure groups that they simply exploit the correlation between determine where public money goes. genetic distance and cultural differences In this set of models, the multiplicity of across populations, as both genes and culture equilibria and the long-term persistence are transmitted from parents to offspring.

74 For a critical view of the use of genetic distance in 73 See also Sombart (1976). economics, see Giuliano, Spilimbergo, and Tonon (2014). Alesina and Giuliano: Culture and Institutions 935

Since the measure of genetic distance uses key determinant of economic success once only neutral genetic markers, which have no the Industrial Revolution had transformed direct effect on fitness and thus on cultural England. A limitation of the paper is that it outcomes, this variable is likely to satisfy the does not explain why this pattern happened exclusion restriction. To test for causality in only in England and not in other countries. the other direction—institutions on indi- Tabellini (2008a and 2010) explores the vidualism—the authors regress measures of interconnection between institutions and individualism at the country level on mea- generalized morality to explain differences sures of institutions (the variables described in development throughout Europe. He above). Institutions are instrumented with studies regions in eight European coun- settler mortality (see Acemoglu, Johnson, tries in which differing levels of generalized and Robinson 2001). morality resulted from different histori- The authors find that individualism exerts cal experiences. Comparing regions within a positive, significant effect on institutions, today’s countries, the author shows that dif- thus implying a flow of causality from indi- fering levels of generalized morality are per- vidualistic culture to institutions. However, sistent, are correlated with good functioning the effect of institutions on culture is not of current institutions, and are favorable to robust across specifications. The authors economic development. Current morality is conclude that the effect of institutions on related to the level of human capital accu- culture might be less robust than the other mulated in the eighteenth century, and to way round, with the caveat that they drew the level of democratization and indepen- their conclusions from a small sample—only dence the regions gained from absolute thirty-five observations. monarchs. Thus, institutions in the distant past led to the development of a culture of Culture, institutions, and economic out- generalized morality, which in turn helped comes: The feedback effect between culture foster well-functioning current institutions. and institutions is particularly relevant in This argument is related to the work by explaining economic growth and other eco- Putnam (1993) and Guiso, Sapienza, and nomic outcomes, such as participation in Zingales (2013) on the development of social the labor market or the provision of in free medieval cities in Italy. In goods. this case as well, ancient institutions led to Doepke and Zilibotti (2008) model the long-lasting cultural changes, which affected interaction between economic opportunities the functioning of current institutions, as we and preference formation through parental discussed in the introduction. (concerning the rate of time pref- Michalopoulos and Papaioannou (2013, erences and the taste for leisure) around the 2014) study the relative importance of culture Industrial Revolution. The idea is simple but and institutions in Africa. In their first paper, powerful. Before the Industrial Revolution the authors look at the spatial distribution­ of (when capital markets were imperfect), the ethnicities before colonization in Africa and rich could rely on rental income and there- show that historical local institutions75—in fore develop a taste for leisure. The middle particular, measures of precolonial political class, working instead in occupations requir- centralization and not national institutions— ing effort, skill, and experience, had to invest can explain within-ethnicity­ differences in in two cultural values: patience (low discount factor) and work ethic. The specific attitudes 75 For the relevance of historical local institutions, see of the middle class, in turn, became the also Gennaioli and Rainer (1997). 936 Journal of Economic Literature, Vol. LIII (December 2015) economic performance, using as a proxy sat- the key role of ethnicity-specific­ traits related ellite images of light density at night. To rule to the role of chiefs, culture, and precolonial out the possibility that precolonial political organization. Second, they find evidence of centralization is capturing some other omit- substantial heterogeneity—in particular, that ted variable, the authors control for geo- national institutions correlate with subna- graphical, ecological, and natural-resource tional development, but only when both par- endowment at the ethnic level. In addition, titions are close to the respective capital cities. they show that the results do not depend They claim that this is consistent with insights on observable ethnic differences in culture, from the African historiography, stressing occupational specialization, and the struc- the inability of states to broadcast power in ture of economic activity before colonization. regions far from the capital.76 In their second paper, the same authors Engerman and Sokoloff (1997) give a dif- reached a more nuanced conclusion. They ferent interpretation of the role of culture and claim that one cannot disentangle institutional institutions in the determination of develop- features of a society from its long-term cultural ment: both represent an indirect mechanism traits, which are transmitted intergeneration- through which geography affects economic ally within ethnic groups. Those deeper ethnic outcomes. In their work, different factor and cultural traits, rather than national institu- endowments—in particular, soil suitability tions, affect economic outcomes in Africa. For for growing sugar, coffee, rice, and in general their main identification strategy, the authors crops characterized by high market value exploit the fact that political boundaries on and —helped foster the the eve of African independence partitioned creation of a small elite, the diffusion of slav- more than 200 ethnic groups across adjacent ery, and the implementation of policies­ and countries. They then compare the economic institutions that perpetuated such inequality, performance of the same ethnic groups, lowering incentives for investment and inno- who were now partitioned in different coun- vation. This was in contrast to societies that tries and thus subject to different national were based on the cultivation of small-scale institutions. With this identification strat- crops (grain and livestock), which had a more egy, they can hold constant geographical and equitable distribution of wealth and better ­ethnicity-specific cultural traits. They found long-term economic performance. that cross-border differences in national insti- Giavazzi, Schiantarelli, and Serafinelli tutions do not systematically translate into (2013) look at the relative importance of cul- differences in economic performance within ture and institutions in determining three partitioned ethnicities—in particular, the pos- labor-market outcomes: the employment rate itive correlation between national institutions of women, average hours worked, and the and development disappears with the inclu- employment rate of the young. The authors sion of ethnicity fixed effects. find that culture matters in two of the three The authors highlight two additional results: outcomes; however, policies and other insti- first, they show that conditioning on the degree tutional characteristics also matter when one of precolonial centralization and the depen- considers their endogeneity. Attitudes toward dence on agriculture and pastoralism substan- women’s role in the family and attitudes tially weakens the cross-sectional coefficient on the national institutions proxy. This finding is consistent with studies of the African his- 76 This result is consistent with models of country for- mation and geographical and cultural distance from the toriography, downplaying the role of national capital (Alesina and Spolaore 2003; Alesina and Reich institutional structures and stressing­ instead 2013). Alesina and Giuliano: Culture and Institutions 937 toward leisure are statistically and economi- whether to hold elections. In particular, with a cally important determinants of the employ- difference-in-differences strategy, they look at ment rate of women and average hours the presence of public goods before and after worked. The measure of attitudes toward elections in various villages. The main result youth independence does not appear to be is that elections have very little effect in vil- important in explaining the employment rate lages with low social capital and a big effect in of the young. The two significant policy vari- villages with high social capital. One of their ables affecting the female employment rate contributions is trying to distinguish kinship and average hours worked are the index of trust from generalized trust. As a proxy for kin- employment protection legislation/tax wedge ship trust, they use the presence of ancestral and benefits. To reach their conclusions, the halls, where people go to venerate the dead authors use a generalized method of moments relatives of their extended family. The authors (GMM) framework that allows them to obtain show that this proxy is inversely related to the consistent estimates when culture is endoge- smooth functioning of democracy. nous and labor-market outcomes persist over The above-mentioned papers all advance time. They use religious beliefs as predeter- the idea that culture and institutions are mined variables in the GMM framework, and complementary. A more general approach is their lagged values as an instrument. They provided in Bisin and Verdier (2015): they also test the robustness of their analysis using develop a more general model in which, as an instrument the attitudes of second- (or depending on the economic environment higher-) generation immigrants to the United and initial conditions, culture and institutions States who arrived from different countries might complement each other, or might act at different points in time. The basic idea is as substitutes, contrasting each other and lim- that the evolution in the attitudes of US immi- iting their combined ability to promote eco- grants is correlated with that of attitudes in nomic growth. They posit an interesting idea: the country of origin, but not with the idio- even when new institutions are introduced syncratic component of the error term in the to increase economic growth, their effect labor-market-outcomes equations. depends on whether the ­appropriate cultural Padró i Miguel, Qian, and Yao (2013) study trait develops to support the new institution.78 the joint interaction of political institutions and social capital in determining the ­provision of public goods in Chinese villages.­ 77 The 78 In their theoretical work, Bisin and Verdier define institutions as mechanisms through which social choices authors argue that elections in Chinese vil- are delineated and implemented—a definition similar lages are more effective at choosing poli- to Acemoglu’s, but much more general. In Acemoglu, ticians who provide more public­ goods in Johnson, and Robinson (2006), political institutions are mechanisms for distributing political power across dif- villages where social capital is higher and gen- ferent socioeconomic groups; in turn, political power eralized trust is high, relative to personalized determines economic institutions that govern economic trust. Identification comes from time varia- activity. In Acemoglu (2003), for example, institutions are represented by an indicator of which political pres- tion in the introduction of village elections, as sure group in a given set has the power to control social the village had no voice in choosing when or choice. Institutional change, then, results from volun- tary concessions by the controlling group, possibly under threats of social conflict. Bisin and Verdier depart from the notion that institutions contain political power and control 77 The authors measure social capital with the presence embedded in one single group. Their measure is more gen- of village temples, considered as a form of voluntary orga- eral; specifically, institutions are modeled as Pareto weights nization. They collect data showing that the presence of associated to the different groups in the social-choice prob- temples is correlated with the presence of other voluntary lem. Institutional change, therefore, happens more incre- organizations. mentally than revolutions and regime changes. 938 Journal of Economic Literature, Vol. LIII (December 2015)

More empirical work is needed to con- we’ve reviewed try to isolate one direction vincingly test hypotheses related to the inter- of causality, by using instrumental vari- action of culture and institutions. The most ables or by looking at historical exogenous successful approach should be able to trace shocks. The existence of complementarities the full impact of culture and institutions between culture and institutions hinders through time, examining specific channels identification. While much progress has and mechanisms. Whoever undertakes this been made in isolating the importance of work will need to collect and compile new culture and institutions, we need to do more data on the evolution both of cultural traits to fully understand their complementarities and of institutions. and how they jointly affect development. To find empirical answers to these questions, researchers will need to assemble a chronol- 4. Conclusions ogy of both cultural change and institutional What roles do culture and institutions play change and then examine the interrelation- in determining the wealth of nations? We have ships between them. argued here that it would be wrong to claim the causal superiority of either. Culture and References institutions interact and evolve in a comple- Acemoglu, Daron. 2003. “Why Not a Political Coarse mentary way, with mutual feedback effects. Theorem? Social Conflict, Commitment, and Pol- Thus, the same institutions may function itics.” Journal of Comparative Economics 31 (4): 620–52. differently in different cultures, but culture Acemoglu, Daron, Davide Cantoni, Simon Johnson, may evolve in differing ways depending on and James A. Robinson. 2011. “The Consequences of the type of institutions. We discussed many Radical Reform: The French Revolution.” American Economic Review 101 (7): 3286–3307. examples of this interaction,­ for different­ Acemoglu, Daron, and Matthew O. Jackson. 2012. types of institutions (such as political and “History, Expectations, and Leadership in the Evo- legal institutions, regulation, and the welfare lution of Social Norms.” Unpublished. Acemoglu, Daron, Simon Johnson, and James A. Rob- state) and different cultural traits (including inson. 2001. “The Colonial Origins of Comparative trust, family ties, individualism, and gener- Development: An Empirical Investigation.” Ameri- alized morality). We also discussed in detail can Economic Review 91 (5): 1369–1401. Acemoglu, Daron, Simon Johnson, and James A. Rob- definitional issues, which are important both inson. 2006. “ Institutions as a Fundamental Cause for clarity of models and for measurement. of Long-Run Growth.” In Handbook of Economic Though the studies we’ve reviewed have Growth, Volume 1A, edited by Philippe Aghion and Steven N. Durlauf, 385–472. Amsterdam and Bos- done much to emphasize the presence of a ton: Elsevier, North-Holland. feedback effect, two major tasks lay ahead. Acemoglu, Daron, Simon Johnson, James A. Robinson, First, we need to better understand the and Pierre Yared. 2008. “Income and Democracy.” American Economic Review 98 (3): 808–42. mechanisms driving the interaction. Most of Acemoglu, Daron, and James A. Robinson. 2006. Eco- the studies still tend to examine an event in nomic Origins of Dictatorship and Democracy. Cam- isolation from other events, except possibly bridge and New York: Cambridge University Press. Aghion, Philippe, , and Pierre Cahuc. 2011. to account for other covariates. However, “Civil Society and the State: The Interplay between the joint dynamics of culture and institutions Cooperation and Minimum Wage Regulation.” Jour- can be much more complex and highly non- nal of the European Economic Association 9 (1): 3–42. linear. Therefore, linear regression methods Aghion, Philippe, Yann Algan, Pierre Cahuc, and tend to be less appropriate than more struc- Andrei Shleifer. 2010. “Regulation and Distrust.” tural analyses of the data. Quarterly Journal of Economics 125 (3): 1015–49. Akerlof, George A., and Rachel E. Kranton. 2000. Second, we need to better understand “Economics and Identity.” Quarterly Journal of Eco- channels of causality. Most of the papers nomics 115 (3): 715–53. Alesina and Giuliano: Culture and Institutions 939

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