How Do Culture and Institutions Jointly Impact Income?

Abstract

The aim of this paper is to look at the joint impact of culture and institutions on economic development by operationalizing the cultural and institutional multipliers conceptualized in the literature. The study uses regression analyses to estimate the two multipliers which are key in an understanding of the interaction of culture and institutions. As for culture, two layers are distinguished, deep culture (values) and a slow-moving cultural layer (beliefs). The cross-country empirical analyses, including IV estimations, provide evidence that the two cultural layers "behave" differently. Deep culture is not a substitute for (better) institutions, however, high-quality institutions can substitute improvement in deep culture, while in the majority of countries, in which institutions are not of high quality, institutions complement improvement in deep culture. Contrary to that, the slow-moving layer does not appear to be a significant determinant of development once institutions are controlled for. But what is more, no sign of interaction with institutions has been detectable. These findings shed light on the unique role of deep culture in economic development.