Historical Prevalence of Infectious Diseases, Cultural Values, and the Origins of Economic Institutions

It is widely believed that economic institutions such as competitive markets, the banking system, and the structure of property rights are essential for economic development. But why economic institutions vary across countries and what are their deep origins is still a question that is widely debated in the developmental economics literature. In this study, we provide an empirical test for the provocative hypothesis that the prevalence of infectious diseases influenced the formation of personality traits, cultural values, and even morality at the regional level (the so called Parasite- Stress Theory of Values and Sociality), which then shaped economic institutions across countries. Using the prevalence of pathogens as an instrument for cultural traits such as individualism, we show in a two-stage least squares analysis that various economic institutions, measured by different areas of the index of Economic Freedom by the Heritage Foundation, have their deep origins in the historical prevalence of infectious diseases across countries. Our causal identification strategy suggests that cultural values affect economic institutions even after controlling for a number of confounding variables, geographic controls, and for different sub-samples of countries. We further show that the results are robust to four alternative measures of economic and political institutions.