Until recently, economists have been reluctant to rely on culture as a possible determinant of economic phenomena. Much of this reluctance stems from the very notion of culture: it is so broad and the channels through which it can enter the economic discourse so ubiquitous (and vague) that it is difficult to design testable, refutable hypotheses. In recent years, however, better techniques and more data have made it possible to identify systematic differences in people's preferences and beliefs and to relate them to various measures of cultural legacy. These developments suggest an approach to introducing culturally-based explanations into economics that can be tested and may substantially enrich our understanding of economic phenomena. This paper summarizes this approach and its achievements so far, and outlines directions for future research.

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Does culture affect economic outcomes

Does culture have a causal effect on economic development? The data on European regions suggest that it does. Culture is measured by indicators of individual values and beliefs, such as trust and respect for others, and confidence in individual self determination. To isolate the exogenous variation in culture, we rely on two historical variables used as instruments: the literacy rate at the end of the 19th century, and the political institutions in place over the past several centuries. The political and social history of Europe provides a rich source of variation in these two variables at a regional level. The exogenous component of culture due to history is strongly correlated with current regional economic development, after controlling for contemporaneous education, urbanization rates around 1850, and national effects. (JEL: O10, F10, P10, N13)

https://www.ifs.org.uk/conferences/tabellini.pdf

Culture and institutions: economic development in the regions of europe

We investigate whether differences in individuals’ experiences of macro-economic shocks affect longterm risk attitudes, as is often suggested for the generation that experienced the Great Depression. Using data from the Survey of Consumer Finances from 1964-2004, we find that birth-cohorts that have experienced high stock market returns throughout their life report lower risk aversion, are more likely to be stock market participants, and, if they participate, invest a higher fraction of liquid wealth in stocks. We also find that cohorts that have experience high inflation are less likely to hold bonds. These results are estimated controlling for age, year effects, and a broad set of household characteristics. Our estimates indicate that stock market returns and inflation early in life affect risk-taking several decades later. However, more recent returns have a stronger effect, which fades away slowly as time progresses. Thus, the experience of risky asset payoffs over the course of an individuals’ life affects subsequent risk-taking. Our results explain, for example, the relatively low rates of stock market participation among young households in the early 1980s (following the disappointing stock market returns in the 1970s depression) and the relatively high participation rates of young investors in the late 1990s (following the boom years in the 1990s).

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Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?*

In a recent study, Nunn (2008) examines the long-term impacts of Africa’s slave trade. He finds that the slave trade, which occurred over a period of more than 400 years, had a significant negative effect on long-term economic development. Although the article arguably identifies a negative causal relationship between the slave trade and income today, the analysis is unable to establish the exact causal mechanisms underlying this reduced-form relationship. In this article, we examine one of the channels through which the slave trade may affect economic development today. Combining contemporary individual-level survey data with historical data on slave shipments by ethnic group, we ask whether the slave trade caused a culture of mistrust to develop within Africa. Initially, slaves were captured primarily through state organized raids and warfare, but as the trade progressed, the environment of ubiquitous insecurity caused individuals to turn on others—including friends and family members—and to kidnap, trick, and sell each other into slavery (Sigismund Wilhelm Koelle 1854; P. E. H. Hair 1965; Charles Piot 1996). We hypothesize that in this environment, a culture of mistrust may have evolved, which may persist to this day. We show that current differences in trust levels within Africa can be traced back to the transatlantic and Indian Ocean slave trades. Combining contemporary individual-level survey data with historical data on slave shipments by ethnic group, we find that individuals whose ancestors were heavily raided during the slave trade are less trusting today. Evidence from a variety of identification strategies suggests that the relationship is causal. Examining causal mechanisms, we show that most of the impact of the slave trade is through factors that are internal to the individual, such as cultural norms, beliefs, and values. (JEL J15, N57, Z13)

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The Slave Trade and the Origins of Mistrust in Africa

How much do cultural biases affect economic exchange? We answer this question by using data on bilateral trust between European countries. We document that this trust is affected not only by the characteristics of the country being trusted, but also by cultural aspects of the match between trusting country and trusted country, such as their history of conflicts and their religious, genetic, and somatic similarities. We then find that lower bilateral trust leads to less trade between two countries, less portfolio investment, and less direct investment, even after controlling for the characteristics of the two countries. This effect is stronger for goods that are more trust intensive. Our results suggest that perceptions rooted in culture are important (and generally omitted) determinants of economic exchange.

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Cultural Biases in Economic Exchange

This paper argues that the growing presence of a new type of man—one brought up in a family in which the mother worked—has been a significant factor in the increase in female labor force participation over time. We present cross-sectional evidence showing that the wives of men whose mothers worked are themselves significantly more likely to work. We use variation in the importance of World War II as a shock to women's labor force participation—as proxied by variation in the male draft rate across U. S. states—to provide evidence in support of the intergenerational consequences of our propagation mechanism.

Mothers and Sons: Preference Formation and Female Labor Force Dynamics

We study the effect of culture on important economic outcomes by using the 1970 census to examine the work and fertility behavior of women born in the U.S. but whose parents were born elsewhere. We use past female labor force participation and total fertility rates from the country of ancestry as our cultural proxies. These variables should capture, in addition to past economic and institutional conditions, the beliefs commonly held about the role of women in society (i.e., culture). Given the different time and place, only the beliefs embodied in the cultural proxies should be potentially relevant. We show that these cultural proxies have positive and significant explanatory power for individual work and fertility outcomes, even after controlling for possible indirect effects of culture. We examine alternative hypotheses for these positive correlations and show that neither unobserved human capital nor networks are likely to be responsible.

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Culture: an empirical investigation of beliefs, work, and fertility

This paper attempts to disentangle the direct effects of experience from those of culture in determining fertility. We use the GSS to examine the fertility of women born in the US but from different ethnic backgrounds. We take lagged values of the total fertility rate in the woman's country of ancestry as the cultural proxy and use the woman's number of siblings to capture her direct family experience. We find that both variables are significant determinants of fertility, even after controlling for several individual and family-level characteristics. (JEL: J13, J16, Z10)

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Fertility: the role of culture and family experience

One of the most dramatic economic transformations of the past century has been the entry of women into the labor force. While many theories explain why this change took place, we investigate the process of transition itself. We argue that local information transmission generates changes in participation that are geographically heterogeneous, locally correlated and smooth in the aggregate, just like those observed in our data. In our model, women learn about the efiects of maternal employment on children by observing nearby employed women. When few women participate in the labor force, data is scarce and participation rises slowly. As information accumulates in some regions, the efiects of maternal employment become less uncertain, and more women in that region participate. Learning accelerates, labor force participation rises faster, and regional participation rates diverge. Eventually, information difiuses throughout the economy, beliefs converge to the truth, participation ∞attens out and regions become more similar again. To investigate the empirical relevance of our theory, we use a new county-level data set to compare our calibrated model to the time-series and geographic patterns of participation.

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Nature or Nurture? Learning and the Geography of Female Labor Force Participation

The early 1980s marked the onset of two striking features of the current world macro-economy: the fall in US business cycle volatility (the great moderation) and the large and persistent US external imbalance. In this paper we argue that an external imbalance is a natural consequence of the great moderation. If a country experiences a fall in volatility greater than that of its partners, its relative incentives to accumulate precautionary savings fall and this results in an equilibrium permanent deterioration of its external balance. To assess how much of the current US imbalance can be explained by this channel, we consider a standard two country business cycle model in which households are subject to country specific shocks they cannot perfectly insure against. The model suggests that a fall in business cycle volatility like the one observed for the US relatively to other major economies can account for about 20% of the current total US external imbalance.

Alessandra Fogli

Papers

Mothers and Sons: Preference Formation and Female Labor Force Dynamics

Culture: an empirical investigation of beliefs, work, and fertility

Fertility: the role of culture and family experience

Nature or Nurture? Learning and the Geography of Female Labor Force Participation

The 'Great Moderation' and the US External Imbalance