Individualism, Collectivism, and Trade

While economists recognize the important role of formal institutions in the promotion of trade, there is increasing agreement that institutions are typically endogenous to culture, making it difficult to disentangle their separate effects. Lab experiments that assign institutions exogenously and measure and control individual cultural tendencies can allow for clean identification of these effects. We focus on cultural tendencies toward individualism/collectivism, which social psychologists highlight as an important determinant of many behavioral differences across groups and people. We design an experiment to explore the relationship between subjects’ dispositions to individualism/collectivism and their willingness to engage in impersonal trade under enforcement institutions of varying strength. Overall, we find that individualists tend to engage in trade more often than collectivists. This effect is mitigated somewhat as the effectiveness of enforcement institutions increases. That is, the detrimental impact on future trade of having been cheated in the past is reduced. Nevertheless we see that cultural dispositions shape the decision to engage in impersonal trade, regardless of institutional environment.