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Greif: Cultural beliefs and the organization of society

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Greif. 1994. Cultural beliefs and the organization of society. Journal of Political Economy 102 (5): 912-950.

The general game Greif sets up:

  • Merchants want to hire agents to hold their merchandise in a distant city. This is a type of prisoner's dilemma. The agents can cheat the merchants. Doing so gives them some payoff. However, there is an optimal wage that makes honesty a rational action (based on the payoff of cheating, future wage potential, and so on). The equilibrium (so far) would be that each merchant pays that wage.
  • Now suppose some merchants belong to an individualist culture and others belong to a collectivist culture. In an individualist culture, if one merchant gets cheated, the other merchants don't care. But in a collectivist culture, if one merchant gets cheated, then all merchants will punish the cheating agent by refusing to hire him ever again. (1) To understand the ramifications of this, assume that every merchant has perfect information about every agent's history. For individualist merchants, the optimal wage does not change. But for collectivist merchants, the optimal wage falls because individual agents have more (future earning potential) to lose from cheating once. (2) Now, drop the assumption of perfect information. If collectivist merchants are to impose joint sanctions, they must pay information costs (perhaps just the time it takes to build and maintain relationships with other merchants). As long as these information costs don't get too high (specifically, as long as they don't get higher than the difference between the individualist-optimal-wage and the collectivist-optimal-wage-under-perfect-information), then collectivist merchants will still be able to pay a lower optimal wage. (3) Thus, there are two rational EQUILIBRIA: be individualist and don't invest in information, or be collectivist and do invest in information [again, assuming information costs aren't too high].

A key implication of this game: because collectivist values lower the optimal wage that must be paid to agents, cooperation can be maintained in situations that would not sustain individualist cooperation.

A refinement:

  • Beside the mechanism above, collective trading also punished merchants who cheated. If an agent cheated a merchant that had previously cheated some other merchant, then the community of merchants would not sanction that cheater. Thus, collectivist merchants faced significant long-term costs if they cheated once. In contrast, individualist traders had no such mechanism.
  • Result #1: Collectivist (Maghrebi) traders were more likely to hire other merchants as agents then to hire simple agents. Since merchant-agents faced higher long-term costs from cheating than simple-agents, the optimal wage that had to be paid to merchant-agents was lower. Thus: merchants hired merchants, creating a horizontal society. Individualist traders, on the other hand, had no such reason not to cheat one another. But since spending time as your agent wasn't as profitable for them as dealing with their own trade, it was cheaper to hire a simple-agent in individualist societies. Thus, individualist merchants create a vertical society.
  • Result #2: Since your optimal wage was positively correlated with your wealth in a collectivist, horizontal society, upward social mobility was difficult. But since your optimal wage was negatively correlated with your wealth in an individualist, vertical society, upward social mobility was easier.

Integration vs segregation:

  • When faced with opportunities to expand trade, Geneoese (individualists) hired agents native to the new area, but Maghrebi only hired as agents fellow Maghrebi merchants who emigrated to the new area.

The major IMPLICATIONS of all this are apparent from the selections below:

"Among the Maghribis, collectivist cultural beliefs led to a collectivist society with an economic self-enforcing collective punishment, horizontal agency relations, segregation, and an in-group social communication network. In a collectivist society, individuals can be induced to forgo "improper" behavior through a credible threat of informal collective economic punishment.

...

"Among the Genoese, individualist cultural beliefs led to an individualist society with a vertical and integrated social structure, a relatively low level of communication, and no economic self-enforcing collective punishment. In such a society a relatively low level of informal economic enforcement can be achieved because of the absence of economic self-enforcing collective punishment and networks for information transmission. Furthermore, the integrated social structure and the low level of communication hinder social and moral enforcement mechanisms. To support collective actions and to facilitate exchange, an individualist society needs to develop formal legal and political enforcement organizations. Further, a formal legal code is likely to be required to facilitate exchange by coordinating expectations and enhancing the deterrence effect of formal organizations."

So individualist values require the creation of formal (legal) enforcement mechanisms, but collectivist values do not.

END RESULT of all this:

The organization innovations that are rational in individualist societies (e.g. the family firm to create an organization with a perpetual life span) leads to additional innovations, perhaps by chance (e.g. the family sells shares in its firm, giving rise to stock markets). Organizations that monitor contracts give rise to laws, accounting regulations, and so on.

And all this may explain why it was the West that developed first.