Endogenous (in)formal Institutions.

Abstract: Despite the substantial evidence documenting the relevance of democracy and a culture of cooperation, we still lack a framework that identifies their origins and interaction. In a model where citizens and elite members try to share consumption risk and cooperate in investment, we show that the elite's willingness to grant democracy is mainly driven by investment-specific factors, and accumulation of culture has an inverse U-shaped relationship with the forces aggravating consumption risk. In addition, shocks shrinking investment surplus can push the citizens to over-invest in culture to credibly commit to future cooperation and so preserve democracy. This is consistent with the geography and the evolution of monasticism and politics in Medieval Europe.