Overview kauffmanjuly15

Cultural transmission of traits and individual choices: A roadmap

Martin Ljunge Kauffman Foundation, July 22nd 2015

The world according to economics

1.  Preferences (ordering of wants) 2.  Technology (available choices) 3.  Equilibrium (supply equals demand)

•  1-3 yield individual choices and market outcomes

•  Preferences usually taken as given, examine how technology affects choices.

•  But (some) preferences are acquired and affect choices.

Social economics study “preferences”

•  How are “preferences” shaped? Cultural transmission

•  How do preferences/norms/beliefs affect choices and outcomes

Cultural transmission

•  Intergenerational transmission of traits

•  In the family –  By parents, vertical transmission

•  In society –  By people in general or institutions, horizontal transmission

•  I study transmission in the family, and how these traits affect outcomes

Which preferences?

•  Trust is a prime example

•  Religion, risk preferences, social preferences, work norms, civic attitudes, gender attitudes, family values, locus of control, individualism vs collectivism, pragmatism, …

Trust

•  “Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.” Arrow (1971)

Measure of generalized trust: •  “Would you say that most people can be trusted, or

that you can't be too careful in dealing with people?”

Trust around the world

•  Highest in Scandinavia –  Almost 2 in 3 people express high trust

•  Lowest in Latin America and Africa –  Brazil, 1 in 17 trust

•  U.S. and other Anglo-Saxon countries fairly high –  About 2 in 5 trust

What is trust

•  Beliefs –  Expectations about the trustworthiness of others

•  Preferences –  Personality/character trait, cf. Almlund et al (2010) –  Trust related to betrayal aversion and risk preference, Fehr

(2009) –  Intergenerational persistence of trust, evidence from

immigrants

•  Trust measures an optimistic character trait

The problem

•  Cross-sectional correlations probably capture causality in both directions

•  Both trust and outcomes observed in the same context

•  Trust may affect choices and outcomes

•  … but your experience may shape your trust as well

Addressing reverse causality

•  If trust is transmitted across generations the trust of the parent is a measure of the child’s trust

•  Correlating child’s trust with the parent’s is a step forward, Dohmen et al (2012, ReStud) –  Yet both trust measures from same families, the child’s

experience can influence his and the parents’ trust

Children of immigrants

•  Children born in the destination country, different context from the parent’s birth country

•  Solution: relate child’s trust to trust in the immigrant parent’s birth country

•  The child’s trust cannot plausibly affect trust in another country – causality, if any, must run from parent to child

Model sketch

1.  Parent’s trust à 2.  Child’s trust à 3.  Child decides to explore potentially productive

opportunities (or not) à 4.  Child outcomes realized

Children of Immigrants

•  Regress the child’s trust on average trust in the parents country of birth –  Account for shared influences, within birth country variation –  Reverse causality is not an issue

Trusticat=b0+b1*Mean_Trusta+b2*Xicat+gc+Tt+eicat

–  c - country of residence, a - ancestral country, c≠a –  gc, Tt country and year fixed effects –  Standard errors clustered by ancestral country

Data

•  European Social Survey (ESS) •  Includes country of birth of individual and parents

–  Children of immigrants in 29 European countries –  Parents born in 87 countries across the world –  2nd to 5th rounds of ESS

•  Trust computed across the waves in the integrated European/World Values Survey

Controls

•  Country of residence fixed effects

•  Demographic controls –  Age, gender, education, labor force status, income, marital

status, religion

•  Ancestral country controls –  Trust, GDP per capita, institutions, etc.

Mother’s trust matters

Quantitatively significant

•  An increase in the mother’s ancestral trust of one standard deviation corresponds to a half the effect of an upper secondary education (compared to less education) or moving from the bottom three deciles of the income distribution to the top three deciles.

Robust to level of development, institutions Women’s labor market role also important

Mother’s trust more important than father’s

Sufficiently high trust persists in low trust environment

What about fathers?

•  Ancestral trust not significant predictor of child’s trust

•  But father’s still matter in trust formation

•  Political institutions in the father’s birth country strong predictor of child’s trust

Historical tech better than current development

Father’s and mother’s influence differs

•  Why? •  Could be that mother’s are more involved in the

social interactions of the child

•  And father’s could be more about rules (more or less hierarchical), which may be influenced by political institutions in the ancestral country

Inherited trust (mother’s) predicts: •  Higher income •  Source of income

–  More income from entrepreneurship and wages, less from benefits

•  Time use –  More time spent working, less in retirement &

unemployment

•  Education attainment –  More human capital

•  Occupations with –  Higher skill content –  Greater autonomy

•  Better health

Relative importance of trust

•  Trust accounts for 43% of the explained variation in income differences across ancestries

•  Regress income on country of origin dummies, plus individual controls and country fixed effects

•  Regress country of origin coefficients on –  Log(GDP) and six WDI institutional characteristics, R2=.15 –  Add ancestral country Trust to model above, R2=.263

Trust and Entrepreneurship

•  Trust promotes successful entrepreneurship since those with high trust are more likely to have entrepreneurial income as their main income source

•  Trust may promote more entrepreneurial occupations as those with higher trust have more work autonomy

•  Moreover, trust promotes individualism, a motivation behind entrepreneurship, and creativity, useful for developing ideas

Recap

•  Ancestral trust shapes trust of children of immigrants

•  Ancestral trust predicts “good” economic choices

•  Evidence trust à economic success –  The method avoids reverse causality

•  The approach can be used to study other influences and other outcomes

References •  Ljunge, Martin. Trust Issues: Evidence on the Intergenerational

Trust Transmission from Children of Immigrants. Journal of Economic Behavior and Organization, 2014, Volume 106, pp. 175-196. Open Access

•  Ljunge, Martin. Social Capital and Political Institutions: Evidence that Democracy Fosters Trust. Economics Letters, 122, 2014, pp. 44-49. Open Access

•  Ljunge, Martin. Social Capital and Health: Evidence that Ancestral Trust Promotes Health Among Children of Immigrants. Economics and Human Biology, 2014, Vol. 15, pp. 165-186. Open Access Länk doi: 10.1016/j.ehb.2014.09.001

•  Ljunge, Martin. Social Capital and the Family: Evidence that Strong Family Ties Cultivate Civic Virtues. Economica, 2015, 82, pp. 103-136.

•  Ljunge, Martin. Cultural Transmission of Civicness. Economics Letters 117 (2012) pp. 291-294.