Corporate Culture, Societal Culture, and Institutions

While both cultural and legal norms (institutions) help foster cooperation, culture is the more primitive of the two and itself sustains formal institutions. Cultural changes are rarer and slower than changes in legal institutions, which makes it difficult to identify the role played by culture. Cultural changes and their effects are easier to identify in simpler, more controlled, environments, such as corporations. Corporate culture, thus, is not only interesting per se, but also as a laboratory to study the role of societal culture and the way it can be changed. * Luigi Guiso: Einaudi Institute for Economics and Finance, Via Sallustiana 62, 00187 Rome, Italy (e-mail: [email protected]); Paola Sapienza: Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208 (e-mail: [email protected]); Luigi Zingales: The University of Chicago, Booth School of Business, 5807 South Woodlawn Avenue, Chicago, IL 60637 (email: [email protected]. Forthcoming AER P&P According to North (1991) institutions foster cooperation in settings without full information and repeated interaction. North classifies institutions in informal (sanctions, taboos, customs, traditions, and codes of conduct) and formal (constitutions, laws, property rights). Informal institutions, which we will refer to as culture, comprise societal values (which affects intrinsic motivations) and social norms. In primitive and simple societies, where personal ties and ostracism are enough to enforce cooperation, culture is the only mechanism. Intrinsic motivation and social norms work well when the rules they prescribe are simple to apply, when they are widely shared, and when social sanction (ostracism or exclusion) is a powerful threat. While these conditions hold in small primitive societies, in most modern societies, they do not. To function modern economies need rules that take into account many contingencies. These complex rules make the verification process difficult requiring specialized (and dedicated) agents. Also, the development of long distance trade requires more impersonal contract enforcement mechanisms that are formalized through political and legal institutions. When economies evolve, formal institutions replace many informal mechanisms of enforcement. Indeed, a dominant thesis argues that the economic success of nations is not driven by culture or value systems but rather by inclusive political institutions (Acemoglu et al., 2001) or by effective legal institutions (La Porta et al., 1998).