Endogenous Institutions and Economic Outcomes

Abstract

To evaluate the relative importance of a culture of cooperation and inclusive political institutions, I divide Europe into 120 km×120 km grid cells, and exploit the exogenous variation in both institutions created by medieval history. I document strong first‐stage relationships between present‐day norms of respect and trust and the severity of consumption risk—i.e. climate volatility—over the period 1000–1600 and between the inclusiveness of present‐day regional political institutions and the factors that raised the returns on elite‐citizenry investments—i.e. terrain ruggedness and direct access to the coast. Building on these first stages, I show that only culture has a first‐order effect on income, even after controlling for country fixed effects, proxies for the alternative roles of the excluded instruments, factors modulating the roles of institutions, and intermediate outcomes. Two possible explanations for these results are that more inclusive regional political institutions might have impeded, in the early modern era, state‐building and market integration, and that in modern representative democracies, they are irrelevant in easing the monitoring of politicians by voters when the latter are not morally compelled to punish political malfeasance or the former have weak civic virtues. Macro and micro evidence supports these ideas.

Endogenous (in)formal institutions

“…Second, the evidence summarized in table 11 suggests a novel instrumental variables approach to separately estimate the effect of each of the two institutions on development. Embracing this strategy, Guerriero (2015) shows not only that the first stages illustrated in this section remain strong when the cross-section identifiers are 120km × 120km grids instead of the regions and one controls for country fixed effects but also that only a culture of cooperation has a first order effect on economic development.…”

“…Hence, a key research agenda is to employ medieval geography to unbundle the effects of both present-day inclusive political institutions and culture on today development through a multiple instrumental variables approach (see Guerriero, [2015]). This is particularly relevant in this day and age if one wants to assess whether the negative short-run impact of epochal crises on markets can be offset by their positive long-run effects on institutions.…”

“…In doing so, we shed light on a key period in history, and we devise a time-dependent measure of past culture, which has been recently shown valid in other contexts (Padró i Miquel et al, 2015). 3 Finally, while characterizing the interactions among activity-specific factors, (in)formal institutions, and the economy, we suggest an instrumental variables approach to separately estimate the role of each institution (see Guerriero, [2015]).…”

“…This evidence together with the fact that Culture strongly correlates with an outcome-based measure of past norms of cooperation discussed below validates our measurement strategy. Crucially, Culture will continue to strongly correlate with Culture-2008 should the latter also include either the strength of individualism and the importance of obedience or norms of hard-work and thrift (seeGuerriero, [2015]).…”