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Culture, democracy and regulation

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Abstract

This paper examines how culture influences business regulation across countries. Empirical analysis reveals that individualistic countries adopt fewer regulations than collectivist countries. This result is independent of political institutions, suggesting that culture directly affects regulation by shaping preferences over economic policy. Individualism’s influence is magnified in democratic countries. These results support a public choice interpretation of regulation where culture may provide an additional check on government’s ability to rent seek via inefficient regulation.

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Notes

  1. Hofstede (2001) finds individualism-collectivism to be the most important dimension in explaining cross-country variation in cultural values, and Gorodnichenko and Roland (2011) empirically show that individualism is the only dimension of culture that is robustly related to economic development. Gorodnichenko and Roland (2017) demonstrate how individualism leads to innovation, which explains cross-country income differences. Ang (2019) finds that individualism underpins financial development.

  2. The findings are consistent if I replace business regulation as the dependent variable with a measure of economic freedom (Gwartney et al. 2019). Results are not tabulated but available upon request.

  3. Given a change in Doing Business methodology, recent data are collected and averaged from 2016 to 2020 to maintain consistency across years and to maximize sample size. One exception is for court regulation. Number of procedures is collected in 2015 since no data is available from 2016 onwards.

  4. The trade regulation index includes time (calculated in hours) and cost of document and border compliance to import and export goods. The debt regulation index includes time (calculated in days) and cost of insolvency proceedings.

  5. An exogenous determinant of institutional quality is included instead of direct measures of institutional quality, such as corruption, as these measures suffer from endogeneity with the main variable of interest, individualism. Thus, direct measures are omitted to avoid misspecification.

  6. Sobel (2017) documents that reductions in trade regulation tend to be the first mover in broader free market economic reforms. Combined, this finding could indicate that individualism promotes reductions in trade regulation, which subsequently encourages greater economic freedom more generally.

  7. For a more detailed discussion of how common law affects business entry regulation, see Davis and Williamson (2016).

  8. The failure to examine the role of cultural values may have led previous research to identify a spurious relation between political institutions and the regulation of entry (Djankov et al. 2002).

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Acknowledgements

This paper is based on remarks prepared for a plenary session at the 2020 Public Choice Society Annual Meeting. The author thanks Roger Congleton for the invitation to write this paper. I also thank two anonymous reviewers whose comments improved the paper. There is no funding to report. Data and Stata code are available upon request.

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Correspondence to Claudia R. Williamson.

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Appendices

Appendix 1

See Table 7.

Table 7 Individualism and regulation, OLS regressions, components of indices

Appendix 2

See Table 8.

Table 8 Individualism and regulation, OLS regressions, Hofstede’s measure

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Williamson, C.R. Culture, democracy and regulation. Const Polit Econ 32, 98–126 (2021). https://doi.org/10.1007/s10602-020-09319-1

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