Essays on Institutions, Culture and Economic Outcomes

Abstract

This dissertation examines how institutions and culture shape each other and affect individuals’ behavior. Chapter 1 analyzes the interplay between the law and prevailing values to understand the origins of legal order in an environment where neither legal nor non-legal institutions, taken separately, are capable of supporting agreements. These institutional imperfections give rise to a distinct way in which the law and prevailing values reinforce each other, and subsequently facilitate transactions. The model gives rise to multiple stable equilibria where identical societies in terms of laws and values may exhibit fundamentally divergent behavioral patterns with significant welfare implications. Analysis of the dynamics of laws and values reveals that the continued congruence of the legal system with the prevailing values may determine the steady-state culture and the equilibria that emerge along the way.

Chapter 2 builds on a widespread notion that culture is acquired through learning and explores ways in which institutions, social structure, and human capital influence culture through a process of learning. In the model, institutions determine the uncertainty of the payoffs from cultural traits, social structure determines the strength of information flows from family and peers, and human capital determines the productiveness of individual deliberations. A unique and stable equilibrium culture emerges from this learning process. Institutions and social structure may influence the spread of values even without affecting the expected payoffs associated with these values. Institutions, social structure, and human capital frequently mute each other’s effects on culture.

Finally, Chapter 3 develops a behavioral experiment to investigate effects of institutions on an important cultural trait – individuals’ tendency to trust in others – even in those contexts where these institutions are irrelevant to the particular trust behavior. In contrast with the previous experimental results but consistent with the literature on the importance of others’ intentions for decisions to reciprocate, I find evidence that institutions facilitating cooperation may decrease an individual's tendency to trust in others in a seemingly unrelated context. Identifying a systematic bias prompted by the institutional environment helps in understanding the potential ways in which institutions may impact individuals’ behavior.