Culture and Household Financial Behavior

Project Start:01/2013
Category: Household Finance
Funded by:LOEWE

Topic and Objectives

The recent eurozone crisis has inspired efforts and pressure for reforms aimed at harmonizing institutions and policies across members. In the face of considerable cultural diversity in Europe, however, one wonders whether sizeable differences in economic behavior, reflecting cultural predispositions, could still exist and persist even in the face of common institutions and policies influencing this behavior. If this is the case, particularly in the sphere of financial behavior, institutional harmonization may not be the right approach: differential institutions and policies may be necessary to neutralize cultural predispositions and harmonize economic behavior across a culturally diverse set of countries, to the extent necessary for the normal functioning of the European Union and adherence to its treaties. This project has studied whether there are sizeable differences in financial behavior linked to cultural predispositions and whether these differences are likely to persist in the face of a common set of relevant institutions and policies that did not arise from the original culture but is accepted by households of different cultural predispositions. As a prerequisite for the analysis, we used two alternative criteria for classifying European countries into cultural groups, both independent of the object of study, namely financial behavior. The first criterion is genetic distance between populations, as a measure to the extent of close interaction in the past. The second criterion is cultural dimensions, namely the set of responses to specific questions on attitudes administered by Hofstede in the 1980s to IBM employees in a wide range of countries.  Following this cultural classification, our approach is then to compare the financial behavior of households that belong to different cultural backgrounds but live in the same country and thus face a common institutional and policy environment. We utilize data from LINDA, a data set of unmatched quality and precision, on natives and immigrants from different European countries that have been exposed to the Swedish institutional and policy environment.

Key Findings

  • Both criteria for classification of countries into cultural groups give a consistent result: In Europe, there is not a unique “southern” culture, but there is a unique “northern” culture.
  • There are persistent differences in household financial behavior that can be plausibly attributed to cultural predispositions.
  • Cultural differences in financial behavior tend to decrease with exposure to common policies and institutions, even when these did not arise from the original culture, but differences tend to be larger among those who have had longer exposure to the original institutions.

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
58Michael Haliassos, Thomas Jansson, Yigitcan KarabulutIncompatible European Partners? Cultural Predispositions and Household Financial Behavior2014 Household Finance Household Portfolios, Household Finance, Cultural Influences on Economic Behavior