Culture, Institutions and the Wealth of Nations

We construct an endogenous growth model that includes a cultural variable along the dimension of individualism-collectivism. The model predicts that more individualism leads to more innovation because of the social rewards associated with innovation in an individualist culture. This cultural effect can offset the negative effects of bad institutions on growth and leads to a higher growth rate and level of output through innovation. Using genetic data as instruments for individualism we provide strong evidence of a causal effect of individualism on income per worker and total factor productivity as well as on innovation. The baseline genetic markers we use are interpreted as proxies for cultural transmission but others have a direct effect on individualism and collectivism, in line with recent advances in genetics and cross-cultural psychology. The effect of culture on long-run growth remains very robust even after controlling for the effect of institutions and other factors. We also provide evidence of a two-way causal effect between culture and institutions. Acknowledgments: We thank Vladimir Asriyan, Dominick Bartelme, and Insook Lee for excellent research assistance. We benefited from discussions with Philippe Aghion, John Bonin, Olivier Coibion, Lewis Davis, Lena Edlund, Fred Finan, David Laiti, Amir Licht, Edward Miguel, Gerard Padro-I-Miquel, David Romer, Guido Tabellini, Daniel Treisman, Luigi Zingales, and seminar participants at UC Berkeley, the Booth School of Business, Michigan, the Harvard-MIT Development seminar, IMT Lucca, the University of Sienna, Stanford, Princeton, UCLA Anderson School of Business, the “Macroeconomic Across Time and Space” conference, the Berkeley Center for Political Economy conference on Endogenous Institutions, the NBER Workshop in Political Economy and the National Academy of Sciences Sackler Colloquium on “Dynamics of Social, Political, and Economic Institutions”, conference participants in the First Annual conference of Belgian economists in 2010 and the 2011 AEA meetings. We are especially grateful to Romain Wacziarg for his comments and suggestions and also thankful to Laura Fejerman from UCSF for clarifications on genetic questions.