Culture and Economic Development: Trust, Self-Determination, and Regional Prosperity

How does culture affect economic prosperity? The question is methodologically difficult because culture is hard to measure and even harder to disentangle from institutions, history, and geography. Professor Guido Tabellini addresses both problems in a study of European regions, using historical variables as instruments for current cultural traits.

Tabellini identifies two cultural dimensions that are strongly associated with regional prosperity: trust and respect for others, and confidence in individual self-determination. The second of these is less familiar but arguably more consequential for economic behavior.

Confidence in individual self-determination is the conviction that deliberate effort is likely to produce results—that economic outcomes are shaped by choices rather than by luck or external forces beyond one’s control. Tabellini measures this using survey data from European regions asking respondents to rate, on a 1–10 scale, how much freedom of choice and control they have over the way their lives turn out.

Regions with high scores on this measure show systematically better long-run economic performance. The finding holds after controlling for contemporaneous education levels, urbanization rates around 1850, and national fixed effects. To establish causality rather than mere correlation, Tabellini instruments current cultural traits using two historical variables: regional literacy rates at the end of the 19th century, and the nature of political institutions prevailing over the past several centuries.

The exogenous component of culture due to history is strongly correlated with current regional economic development. The data do not reject the over-identifying assumption that the two historical variables only influence regional development through culture.

The result adds to a body of evidence—including Robert Putnam’s work on social capital in Italy and the broader trust-and-growth literature stemming from Knack and Keefer—suggesting that the cultural environment shapes incentives for investment, innovation, and cooperation in ways that compound over generations.

For development policy, the implication is both important and uncomfortable. Institutions can be reformed on a legislative timescale; culture changes much more slowly. If cultural traits are a genuine causal input to prosperity rather than merely a correlate, then institutional reform alone may be insufficient to close regional or cross-country income gaps.