Avner Greif. 1994. Cultural Beliefs and the Organization of Society

Avner Greif. "Cultural Beliefs and the Organization of Society," Journal of Political Economy 102, 5 (1994): 912-950.

The paper models an economic transaction central to two trading societies (the premodern Muslim and Latin worlds) to examine the relations between culture and societal organization in the related multiple equilibria game.

1. Cultural Beliefs and the Organization of Society
• Cultural beliefs: the ideas and thoughts common to several individuals that govern interaction and different from knowledge in that they are not empirically discovered or analytically proved; how individuals (without coordination) expect others to act in various contingencies.
• Unlike strategies, cultural beliefs are qualities of individuals in the sense that cultural beliefs that were crystallized with respect to a specific game affect decisions in historically subsequent strategic situations. Past cultural beliefs provide focal points and coordinate expectations, thereby influencing equilibrium selection and society's enforcement institutions. 
• Organizations: the endogenous human constructs that alter the rules of the game and, whenever applicable, have to be an equilibrium.
• They reinforce the cultural beliefs that led to their adoption.
• Enforcement institutions are composed of cultural beliefs and the rules of the game. They may change in the long run as individuals attempt to improve their lot by establishing organizations that alter the rules of the game via players, information, payoffs. 
• Necessary condition for organizational change: those that initiate it expect to gain from it, based on cultural expectations.
• Once a specific organization is introduced, it influences the rules of historically subsequent games and hence the resulting societal organization. 
2. Agency Relations and Cultural Beliefs
• The societies of the eleventh century begin examined:
1. Genoa - long-distance overseas trade was central to Genoa's economy.
2. Muslim Mediterranean - Maghribi traders (Jewish merchants) were involved in large-scale, long distance trade all over the Mediterranean. 
• The merchant-agent commitment problem:
• Merchants needed to travel overseas to trade centers or obtain merchandise or hire agents who would do so and handle the merchandise. But an agent might embezzle the merchant's goods.
• For agents to be employed, the organization of society had to enable them to commit themselves ex ante to be honest ex post after receiving the merchant's goods. 
• Strategies of collectivist and individualist societies for dealing with agency relations:
• Premise for differences in strategies: in collectivist societies everyone is expected to respond to whatever has transpired between any specific merchant and agent; the opposite holds true for individualist societies and players are expected to be indifferent.
• In both societies, a merchant hires, for a wage, an unemployed agent whom he hires as long as cheating or forced separation does not occur.
• Differences: 
1. Under the individualist strategy, a merchant randomly hires an unemployed agent; under the collectivist strategy, a merchant randomly hires only from among the unemployed agents who have never cheated. 
2. Under the individualist equilibrium, merchants do not invest to acquire information because history has no value and an agent's wage is independent of it. Under a collectivist equilibrium, the optimal wage is a function of an agent's history and the merchant will invest. 
• In equilibrium for both individualist and collectivist societies, merchants randomly hire unemployed agents and agents never cheat. 
3. The Maghribis and Genoese: Origin and Manifestations of Diverse Cultural Beliefs
• Historical records indicate that cultural "focal points" as well as social and political events in the early development of Magribis and Genoese societies were likely to be instrumental in shaping diverse cultural beliefs and the related equilibria in these groups.
• Magribis - a collectivist equilibrium was a natural focal point.
• Genoese - an individualist equilibrium was the natural focal point. 
• Historical evidence indicates that the Maghribis invested in sharing information and the Genoese did not.
4. Within the Boundaries of the Game: Cultural Beliefs, Social Patterns or Agency Relations, and Wealth Distribution
• Under collectivist cultural beliefs, a merchant who cheated in the past (when he was hired as an agent) can no longer rely on collective punishment to deter his agent from cheating him and therefore has to pay a higher wage to keep the agent honest. Merchants acting as agents lose out in the long run, so merchants strictly prefer to hire other merchants as agents.
• Under individualist cultural beliefs, a merchant who cheats while providing agency services does not have to pay more to his agents in the future and hence a merchant is not motivate to employ another merchant. 
• Under individualist cultural beliefs, a society reaches a vertical social structure for a larger set of initial conditions than under collectivist cultural beliefs, where a society reaches a horizontal social structure for a larger set of initial conditions. 
• Maghribi trader relations with horizontal agency relations--merchants hiring merchants to act as agents--confirms this.
• Genoese traders with vertical agency relations--wealthy merchants rarely, if ever, functioning as agents and poor agents rarely, if ever, functioned as merchants--also confirms this.
• Vertical agency relations allowed greater upward mobility for the poorer than horizontal relations since in vertical agency relations, the ability to commit is negatively related to wealth. 
5. Transcending the Boundaries of the Game: Segregated and Integrated Societies
• A joint economy is segregated if, given the initial conditions, merchants from each economy strictly prefer to hire agents from their own economy.
• A joint economy is integrated if, given the initial conditions, merchants from at least on economy are indifferent about the original economy of their agents. 
• In response to geographical expansion of tradeable territories, there is some doubt whether collective punishment works in intereconomy agency relations; the uncertainty contributes to a higher optimal wage in a collectivist economy. As the merchants' cost of establishing intereconomy agency relations is higher than the cost of establishing intraeconomy agency relations, only the latter will be initiated and segregation would result (unless efficiency gains of intereconomy agency relations are sufficiently large).
• For two individualistic economies, intereconomy and intraeconomy optimal wages are the same because the uncertainty mentioned previously in the last bullet point is irrelevant for the determination of the optimal wage. Efficiency gains from intereconomy agency relations will motivate merchants to establish them.
• When intereconomy agency relations become possible between a collectivist and an individualist economy, a collectivist merchant would not initiate intereconomy agency relations regardless of the uncertainty regarding the individualist merchants' responses unless efficiency gains from interagency relations are high enough. 
• Because the collectivist economy's wage is lower, individualist merchants may find it optimal to establish intereconomy relations even if such relations do not imply efficiency gains. 
6. Transcending the Boundaries of the Game: Organizational Evolution
• In a collectivist society, coordinating collective punishment and what constitutes "improper" behavior is likely to be based on informal mechanisms such as customs and oral tradition.
• In an individualist society, formal legal and political enforcement organizations are needed to support collective actions and to facilitate exchange. A formal legal code is likely required to facilitate exchange by coordinating expectations.
7. Conclusions
1. Differences in the societal organization of the two trading societies can be consistently accounted for as reflecting diverse cultural beliefs.
2. The theoretical and historical importance of culture in might determine societal organizations, lead to path dependence of institutional frameworks, and in forestall successful intersociety adoption of institutions.
3. The collectivist system is more efficient in supporting intraeconomy agency relations and requires less costly formal organizations (such as law courts), but it restricts efficient intereconomy agency relations.
4. The individualist system does not restrict intereconomy agency relations but is less efficient in supporting intraeconomy relations and requires costly formal organizations.