Endogenous Institutions and Economic Outcomes.
Abstract: This paper evaluates the relative importance of a ``culture of cooperation,'' which is the strength of norms of trust and respect for others, and ``inclusive political institutions,'' which enable voters to check the power delegated to their representatives. I divide Europe into 120km x 120km grids and exploit exogenous variation in both institutions driven by Medieval history. In particular, I document strong first stage relationships between present-day culture and the forces that aggravated consumption risk---i.e., climate volatility---between 1000 and 1600 and between the inclusiveness of present-day regional political institutions and the factors that shaped the returns from elite-citizenry investments in the Middle Ages, i.e., terrain ruggedness and direct access to the coast. Using this instrumental variables approach, I show that only culture has a first order effect on development, even after controlling for country fixed effects and present-day human capital, financial development, sectoral specialization, climate volatility, and distance to the coast. Crucially, the excluded instruments have no direct impact on development and the economic effect of culture holds within pairs of adjacent grids with different Medieval climate volatility. An explanation for these results is that culture but not democracy is necessary to produce public-spirited politicians and push voters to punish political malfeasance. Micro-evidence supports this idea.
