Individualism, collectivism, and trade

Abstract

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 contributions. Lab experiments that assign institutions exogenously and measure and control individual cultural characteristics can allow for clean identification of the effects of institutions, conditional on culture, and help us understand the relationship between behavior and culture, under a given institutional framework. 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’ degree of individualism/collectivism and their willingness to abandon a repeated, bilateral exchange relationship in order to seek potentially more lucrative trade with a stranger, under enforcement institutions of varying strength. Overall, we find that individualists tend to seek out trade more often than collectivists. A diagnostic treatment and additional analysis suggests that this difference may reflect both differential altruism/favoritism to in-group members and different reactions to having been cheated in the past. This difference is mitigated somewhat as the effectiveness of enforcement institutions increases. Nevertheless we see that cultural dispositions are associated with willingness to seek out trade, regardless of institutional environment.

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Notes

  1. 1.

    Triandis, in this book, coined the terms idiocentrism and allocentrism for individual-level analysis of individualism and collectivism. In this paper, however, we use the more familiar terms individualism and collectivism.

  2. 2.

    The only exception to this that we’ve been able to find is a discussion of “holistic individualism” among followers of New Age religions (Farias and Lalljee 2008).

  3. 3.

    Figure B1 in Online Appendix B displays the distribution of choices in the risk preference elicitation for the curious reader.

  4. 4.

    Since e.g. risk-averse agents may still prefer not to trade in the SPNE of the SE treatment, and risk-lovers may prefer to trade, even in the WE treatment, we included the risk \(\times\) treatment interactions. Lower values of the variable “risk” imply more risk-aversion. Wald tests indicate that there is no statistically significant correlation with risk preferences in the NE, WE, or SE treatment, p values = 0.70, 0.11, and 0.31, respectively.

  5. 5.

    Subjects, from the farmers’ point of view, see the common stage narration. They are informed that this stage lasted for four periods in the sessions conducted in the same laboratory a year ago. Next, subjects read the NE treatment narration. For details, see Online Appendix B.2.

  6. 6.

    Subjects see the same sequence of narration as a traveling merchant would in the NE treatment. For details, see Online Appendix B.2.

  7. 7.

    Third party enforcement is mainly imposed through a “court” that probabilistically punishes non-sharing behavior. Fehr and Fischbacher (2004), however, used human third party enforcement in both a dictator and prisoner’s dilemma game. They find that human third party enforcement punishes selfish behavior roughly \(60\%\) of time at a cost to herself and therefore encourages sharing/cooperation.

  8. 8.

    Although in this experiment an exogenously implemented enforcement mechanism mitigates the relationship between culture and willingness to trade, in practice institutions are rarely exogenously imposed. In a recent experiment which compares the endogenous institutional choices of individualists and collectivists, Hajikhameneh (Working paper) found that collectivists are inclined to employ an informal reputation system to enforce trade when both a reputation system and a formal enforcement mechanism are simultaneously available. This suggests that cultural dispositions also influence preferences over institutions, which may help explain why some cultures are less likely to develop and employ formal enforcement institutions, despite their apparent effectiveness.

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Acknowledgements

The authors thank the Social Science and Humanities Research Council of Canada and the Teaching and Learning Centre at Simon Fraser University for financial support. We would also like to thank the editor and two anonymous referees,Tanya Broesch, Kevin Chen, Greg Dow, David Freeman, David Jacks, Laurence Iannaccone, Michael McBride, Angela de Oliviera, Rob Oxoby, Jared Rubin, John Spraggon, and audiences at the 2015 Economic Science Association North American meeting, 2016 Association for the Study of Religion, Economics and Society Annual Conference, and the University of Massachusetts-Amherst Behavioral and Experimental Economics Reading Group for helpful comments. Figures were created using the open-source statistical software R.

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Correspondence to Erik O. Kimbrough.

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Hajikhameneh, A., Kimbrough, E.O. Individualism, collectivism, and trade. Exp Econ 22, 294–324 (2019). https://doi.org/10.1007/s10683-017-9560-1

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Keywords

  • Individualism
  • Collectivism
  • Exchange
  • Trust
  • Experiments

JEL Classification

  • C7
  • C9