Culturally Risk Averse? – A Model of Economic Growth with Endogenous Culture

This research studies the dynamic interplay between the evolution of cultural traits and the process of economic development. In particular, this paper shows how cultural attitudes, in this case differences in risk attitudes, influence economic decision making while at the same time illustrating how these attitudes endogenously change over time. In order to study this joint evolution of cultural and economic variables, an endogenous growth model is integrated with a cultural transmission mechanism along the lines of Bisin & Verdier. This provides us with a framework for the analysis of cultural attitudes that is both general and flexible so that it could be adapted for the study of culture in its full multidimensionality. The model predicts that higher economic success of more risk tolerant agents will over time lead to an increase in their representation in the society, which in turn will speed up economic growth. At the same time, though, the more risk averse type will not be completely eliminated. Using individual level data on risk attitudes across Chinese provinces, empirical evidence supporting this relationship between economic incentives and risk attitudes is provided.