Cultural Context: Explaining the Productivity of Capitalism

Does capitalism perform better when embedded in certain cultures? Given the wide range of economic outcomes, we address potential causes for the effectiveness or ineffectiveness of institutional constraints. This paper argues that culture matters for the success of capitalist institutions, specifically economic freedom. We claim that different cultures may raise or lower the productivity of economic institutions by either constraining or supporting these rules. We analyze this relationship empirically by examining how the interaction between economic freedom and culture affects economic growth. Our results suggest that culture does, indeed, enhance the effectiveness of capitalism and its subsequent impact on growth.

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