Moderating national institutions

The difficulty of separating the effects of national institutions from those of national culture have been highlighted in the literature (see e.g., Dearmon and Grier, 2009, Gorodnichenko and Roland, 2011, 2017, Licht et al., 2007). Diverse attempts to disentangle the two factors have not yet led to a comprehensive and consistent answer whether culture affects institutions or vice versa. Our data indicates a correlation of approximately 0.3 between our two regional cultural factors and three different measures for the national institutional quality (Government Effectiveness, Rule of Law and Absence of Corruption). Particularly, regarding corruption some literature suggests that a corruption-prone culture which is predominantly found in regions with a tendency to appreciate Obedience (see e.g., Ball, 2001, Chambers and Hamer, 2012, Kyriacou, 2016) will influence the power or even existence of an anti-corruption policy and vice versa. Our data does not allow us to investigate potentially causal links between culture and diverse institutional variables including corruption. However, employing regional culture and including country and time fixed effects contributes to solving the challenge of capturing the effect of national institutions over time and of separating it from the effects of regional culture.

Moreover, we can take a fresh look at potential moderating links between culture and institutions. The relevant research question here is whether regional cultural variables have the potential to affect links between national institutions and income. To do so, we perform a more refined analysis with our regional data to investigate the interaction effects between regional culture and national institutions which the previous literature was unable to do. In Table 5, we estimate equation (2) to explore the moderating role of three measures for institutional quality (Government Effectiveness, Rule of Law and Absence of Corruption) on the influence of regional culture on regional GDP per capita.

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The coefficients of all national institutional variables show a positive influence of institutions on regional GDP in all specifications, even when controlling for country and time fixed effects31.

Moreover, we also observe that the regional cultural values of Independence and Obedience remain statistically relevant, although they become less robust when adding controls for human capital and religion (control set II).

We are particularly interested in the interaction terms between national institutions and regional culture. The interaction terms reveal that national institutions have a relevant moderating power on the influence of regional culture on regional GDP per capita. The significant interaction terms with Independence show a negative sign, meaning that the overall positive influence of Independence is reduced in the presence of strong institutions, i.e., higher Government Effectiveness, higher Rule of Law or higher Absence of Corruption at the national level reduces the influence of regional culture on regional GDP. Similarly, the negative effect of Obedience is weakened by strong institutions, which is expressed by the positive sign of the interaction terms with Rule of Law and Absence of Corruption.

These results support the view that national institutions and cultural values act as substitutes, i.e., with strong institutions, culture is less important while in nations with weak institutions, cultural traits matter more for economic development. This interpretation is consistent with results from Knack and Keefer (1997) who find that the effect of trust is lower in countries with high institutional quality. It also supports findings by Ahlerup et al. (2009) who argue that culture is more important in countries with low institutional quality.

31 Note that when estimating with country-time fixed effects as in previous estimations, national institutions cannot be included as a control variable due to perfect collinearity.

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Table 5: The moderating role of national institutions (Government Effectiveness, Rule of Law, Absence of Corruption) for the effect of Independence and Obedience on regional per capita income

Dependent variable:

Residual Std. Error 0.369 (df=2,052)

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Residual Std. Error 0.368 (df=2,052)

Note: The regressions estimate the effect of regional culture (Independence, Obedience) on logarithmized regional GDP p.c. in regressions with national institutions (Government Effectiveness, Rule of Law, Control of Corruption) as well as their interaction with culture, including all control variables and country and time fixed effects. Robust clustered standard error estimates (Region-level) are presented below the coefficients. Significance levels are indicated by *p<0.1; **p<0.05; ***p<0.01; Control variables set 1 includes the following covariates: Latitude, Inverse distance to coast, Malaria ecology, Ln(Oil Gas Production), Ln(Pop density), Capital in region, Temperature, Landlockedregion, Length coast, Border to other regions and the number of borders to other countries. Control variables set 2 includes the following covariates: Years education, Trust, Christian, Muslim, Hindu, Buddhist, No religion and other religion (omitted category).

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We further explore such interactions between regional culture and national institutions in Table 6 and Table 7. In particular, we extract countries with a federal system of government from our sample (Forum of Federations, 2007) and rerun the regressions of Table 5 for federal and centralized state systems. National institutions still have a strong effect on regional incomes in centralized state systems but lose their moderating role for regional culture. This is suggestive for the view that regional culture is more important in centralized states where regional culture can substitute the role of inexistent regional institutions. This contrasts with countries under a federal system as they are to some extent also characterized by more decentralized institutions that might themselves act as substitutes for regional culture32.

Altogether, our results suggest that national institutions have a moderating effect on the link between regional culture and regional incomes per capita, which is consistent with the view that culture and institutions can act as substitutes.

32 Unfortunately, we cannot explore potential moderating effects of regional institutions further as such data is not available to the best of our knowledge. Exploring such interactions could be an interesting avenue for future research.

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Table 6: The moderating role of institutions (Government Effectiveness, Rule of Law, Absence of Corruption) on Independence and Obedience for a subsample of countries with a federal state system

Dependent variable:

Residual Std. Error 0.37 (df=659)

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Residual Std. Error 0.372 (df=659)

Note: The regressions estimate the effect of regional culture (Independence, Obedience) on logarithmized regional GDP p.c. in regressions with national institutions (Government Effectiveness, Rule of Law, Control of Corruption) as well as their interaction with culture for a subset of federalist countries, including all control variables and country and time fixed effects. Robust clustered standard error estimates (Region-level) are presented below the

coefficients. Significance levels are indicated by *p<0.1; **p<0.05; ***p<0.01; Control variables set 1 includes the following covariates: Latitude, Inverse distance to coast, Malaria ecology, Ln(Oil Gas Production), Ln(Pop density), Capital in region, Temperature, Landlockedregion, Length coast, Border to other regions and the number of borders to other countries. Control variables set 2 includes the following covariates: Years education, Trust, Christian, Muslim, Hindu, Buddhist, No religion and other religion (omitted category).

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Table 7: The moderating role of institutions (Government Effectiveness, Rule of Law, Absence of Corruption) on Independence and Obedience for a subsample of countries with a centralized state system

Dependent variable:

Residual Std. Error 0.369 (df=1,388)

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Residual Std. Error 0.365 (df=1,388)

Note: The regressions estimate the effect of regional culture (Independence, Obedience) on logarithmized regional GDP p.c. in regressions with national institutions (Government Effectiveness, Rule of Law, Control of Corruption) as well as their interaction with culture for a subset of centralized countries, including all control variables and country and time fixed effects. Robust clustered standard error estimates (Region-level) are presented below the

coefficients. Significance levels are indicated by *p<0.1; **p<0.05; ***p<0.01; Control variables set 1 includes the following covariates: Latitude, Inverse distance to coast, Malaria ecology, Ln(Oil Gas Production), Ln(Pop density), Capital in region, Temperature, Landlockedregion, Length coast, Border to other regions and the number of borders to other countries. Control variables set 2 includes the following covariates: Years education, Trust, Christian, Muslim, Hindu, Buddhist, No religion and other religion (omitted category).

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