Individualism and Economic Development: Evidence from Rainfall Data

This paper contributes to the economics of culture by introducing an instrument for individualism that is supported by economic theory. Extending a familiar model of risk sharing arrangements to incorporate optimal socialization decisions, I show that collectivist social ties are stronger in riskier environments. This result motivates the use of rainfall variation, a measure of exogenous agricultural risk, as an instrument for individualism. Using this variable and a measure of individualism from the World Values Survey, I find that rainfall variation reduces individualism. Moreover, I find that individualism has a large, statistically significant effect on economic development: a standard deviation increase in individualism causes per capita income nearly to triple. This result is robust to the inclusion of a variety of variables that control for potential correlations between rainfall variation and agricultural development, institutional quality, and cultural variation linked to religion and regional location.