Is culture a determinant of financial development?

Culture, Trust, Better Finances

Published on 5 February 2012

Author(s): Dutta, Nabamita and Mukherjee, Deepraj

Type:  Research paper 14 Pages

The paper investigates the missing link in the literature – whether informal institutions, or what is known as culture, can affect the level of financial development for a country?

Our hypothesis stresses that the cultural dimensions of a country can have an impact on its financial set up. We consider multiple dimensions of culture, identified in the literature by Tabellini, to test our hypothesis.

As culture evolve in the form of greater trust, control and other traits, individuals’ attitudes towards financial market change, and they engage in greater financial transactions.

This, in turn, leads to better financial development. Using quantile estimation technique for a cross-section of 90 countries we find that culture significantly influences the level of financial development. To ensure the robustness of our findings we use Hofstede’s cultural dimension-‘uncertainty avoidance index’ as an alternative measure for culture. Our results hold for multiple measures of financial development.

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(Originally published 13. May 2011)

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