On the Coevolution of Individualism and Institutions
59 Pages Posted: 27 Jun 2022
Date Written: June 19, 2022
To unravel the roots of the relationship between the Individualism-Collectivism dimension of culture (IC) and market-supporting institutions, we develop a micro-founded model in which the two interact and coevolve. IC and institutions are related indirectly, via social organization: Individuals settle either in the City, an individualistic, interest-based organization, or in the Clan, a collectivistic, kinship-based organization. In a static model, the size of the City positively depends on the strength of individualistic inclinations and on the quality of market-supporting institutions. In a dynamic model, where IC and institutions are endogenous, there exist up to two stable steady states, one with a predominately individualistic culture, high institutional quality and a large City, and one with a completely collectivistic culture, no institutions and a desolate City. The convergence to each steady state depends on initial conditions of IC. We conclude that contemporary IC and institutions exhibit path dependence and are thus related to the historical conditions in each region. Using institutional and historical data, we provide empirical evidence in support of our model. In addition, we apply the model to a specific historical case: the cultural and institutional divergence between China and Europe.
Keywords: Economic History, Comparative Development, Culture, Institutions
JEL Classification: N10, N40, O40
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