The cultural foundations of economic failure: A conceptual toolkit

• Published in: Journal of economic behavior & organization Vol. 126; pp. 5 - 24
• Main Author: Collier, Paul
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.06.2016; Elsevier Sequoia S.A
• Subjects: Bayesian analysis; Beliefs; Causality; Cultural change; Cultural factors; Culture; Dysfunctional; Economic analysis; Endowment; Equilibrium; Identity; Narratives; Norms; Social networks; Studies; O35; D87; Beliefs; D03; Social networks; Cultural change; Culture; B41
• ISSN: 0167-2681; 1879-1751
• DOI: 10.1016/j.jebo.2015.10.017

•The paper gives a clear, measurable economic meaning to a culture.•It applies both to the cultures of entire societies, and to those of firms and families.•It is particularly pertinent for understanding why dysfunctional cultures can be persistent. This paper proposes a framework for integrating mental constructs into economic analysis. It considers three types of belief: identities, narratives and norms. Identities influence preferences; narratives influence how causal relationships are (mis)understood; norms determine self-imposed constraints. The beliefs are acquired pre-rationally, through participation in social networks which are initial endowments; subsequent choice of network participation is path dependent. Actors rationally maximize their utility subject to these beliefs, but the beliefs themselves are contaminated by these endowments of irrationality. In equilibrium, beliefs and networks are locally stable and constitute a ‘culture’: the culture can be that of an organization, an entire society, or a family. Local stability is achieved partly through interactions between the three types of belief, and partly through the interaction of beliefs and networks. A dysfunctional culture generates behaviour that yields bad outcomes. If these forces are strong, Bayesian updating from mistakes can be frustrated: dysfunctional cultures can be traps. Principals can use various control variables to improve (or preserve) outcomes by targeting beliefs. The framework enables a systematic approach to dysfunctional cultures.