Endogenous (In)Formal Institutions
52 Pages Posted: 20 Jul 2012 Last revised: 29 Mar 2018
Date Written: March 25, 2018
Despite the overwhelming evidence pointing at the relevance of inclusive political institutions and a culture of cooperation, we still lack a framework that identifies both their origins and interaction. In a model in which an elite and a citizenry try to cooperate in sharing consumption risk and in investment, we show that the prospect of a sufficiently profitable investment pushes the elite to introduce more inclusive political institutions to convince the citizens that a sufficient part of its return will be shared via public spending. In addition, accumulation of culture rises with the severity of consumption risk at its moderate values and then drops at its high values making cheating too appealing. Finally, the citizenry may ``over-accumulate" culture to credibly commit to cooperate in investment when its value is or becomes so low to endanger inclusive political institutions. These predictions are consistent with the evolution of activity-specific geographic factors, the inclusiveness of political institutions, and the activity of the Cistercians and the Franciscans, which is our proxy for the citizenry's culture, in a panel of 90 European regions spanning the 1000-1600 period. Crucially, our estimates remain stable across several identification strategies.
Keywords: Geography, Culture, Democracy, Development
JEL Classification: O13, H10, Z10, O10
Suggested Citation: Suggested Citation