Sep 1, 2009

Trust is built by a competitive environment

The study of culture and economics has become super interesting as recent methods to identify causality (use the culture of second generation migrants, natural experiments etc…) have shown that in many ways culture affects economic outcomes and is quite persistent. But if this was the whole story poverty would be irremediable…there must be a way to change culture…

Recently I have been way more interested in what shapes culture than in how culture shapes outcomes, mostly inspired by Ha Joon Chang who reminded us that the Japanese were once perceived as lazy and the Germans as thieves.

So how do economic institutions cause culture? This Vox column reminds us “Montesquieu had argued that markets themselves created civilised people. But early in the 20th century, the sociologist, Georg Simmel argued that it’s not markets per se that lead to good culture, but market competition. Uncompetitive markets would not build it, but competitors pitted against each other in a quest for market share would”. This is the hypothesis explored by the underlying paper.

Using a US natural experiment where financial deregulation happened at different times across states and created more competition, it shows that increased sectoral competitiveness increased trust levels at the state level. It also shows that workers whose firms are located in competitive sectors have higher trust levels. It is quite convincing in arguing against the possibility of selection and omitted factor bias and in explaining that trust is built when working in a competitive environment.

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