The Interaction of Individual Values and Sticky Formal Institutions in Economic Development

Abstract: The aim of this paper is take a step towards further developing our understanding of how culture affects economic development, as suggested by Manski (2001). Attempting to follow his two propositions, (1) I have restricted my concern to a very specific question, namely the analysis of the possible interaction of individual values and sticky formal institutions in development; and (2) I have used “better” data, i.e. data based on a priori theorizing rather than on ad hoc survey questions. I have relied on the theoretical framework of institutional stickiness (Boettke et al. 2008) which suggests that individual values are embodied and crystallized in the stickiest formal institutions of a society, leading to a “stuck-together” phenomenon, acting as an additional factor in development. The empirical investigations have provided details as regards the interaction of values and institutions. More specifically, besides establishing that both values and sticky formal institutions are strong determinants of long-run income, I have found that the interaction of values and institutions in the long run reinforces the impact of values on development in the good-institution countries. Furthermore, better formal institutions increase the marginal income-increasing effect of those individual values that are favorable to development. These findings suggest that values have a genuinely unique role in development. The results seem to be very robust.