Is Culture a Determinant of Financial Development?
13 Pages Posted: 12 May 2011 Last revised: 31 May 2011
Date Written: April 10, 2011
The paper investigates the missing link in the literature – whether informal institutions, or what is known as culture, can affect the level of financial development for a country? Our hypothesis stresses that the cultural dimensions of a country can have an impact on its financial set up. We consider multiple dimensions of culture, identified in the literature by Tabellini, to test our hypothesis. As culture evolve in the form of greater trust, control and other traits, individuals’ attitudes towards financial market change, and they engage in greater financial transactions. This, in turn, leads to better financial development. Using quantile estimation technique for a cross-section of 90 countries we find that culture significantly influences the level of financial development. To ensure the robustness of our findings we use Hofstede’s cultural dimension – ‘uncertainty avoidance index’ as an alternative measure for culture. Our results hold for multiple measures of financial development.
Keywords: Informal Institutions, Financial Development, Culture, Social capital
JEL Classification: O17, G1, Z10
Suggested Citation: Suggested Citation