Social capital and financial development

Abstract

What is the driving force of development? Cultural economics explains the discrepancy of development when taking social capital as a workhorse. Driven by cultural factors, social capital describes how individuals and institutions work cooperatively and enables them to produce efficient economic outcomes. From this perspective, the discussion of how culture nurtures social capital has become a topic of study in recent years. Where we are now is a result of what we have gone through in the past. Similarly, disparities in cross-regional development can also often be explained by traumatic shocks experienced in bygone history. This persistence effect from the distant past to present-day outcomes works through psychological and sociological processes and persists thanks to intergenerational transmission. This thesis adds to this strand of research and examines how variations in modern financial development can be explained by traumatic historical shocks that altered local social capital in a region. The first essay argues that the Cultural Revolution in China (1966-1976) shaped some of the key financial fundamentals in today's China. The Cultural Revolution accounts for a lingering mistrust among the Chinese population. This degradation of social capital is manifested in present-day households' obstacles in accessing finance, particularly of the informal credit-related type. Residents living in those regions that were severely affected by the Cultural Revolution are observed to have less trust in the financial system, lower participation in financial markets, and a lower willingness to provide private loans. The second essay analyses the cultural link between anti-Jewish pogroms in the historical "Pale of Settlement" and the present-day access of firms to finance. Firms located in regions with a higher historical intensity of pogroms tend to experience higher financial constraints, which manifest in a greater reliance on internal finance, reduced access to trade-credit finance, and reduced access to banking finance. The financial-antipathy mechanism explains these effects, which are seen to diminish with the distance from the site of historical pogrom activity. The third essay discusses how the "Collapsed Wall" - German separation that lingeringly contributes to the East-West discrepancy between present-day household financial decisions in Germany. This essay finds that present-day residents of East Germany report lower general trust, lower trust in financial matters, less access to financial markets, and feel less financial security. However, women in Eastern Germany make more financial decisions and show greater concern about economic and financial matters than in the West. Overall, this thesis provides a battery of insights concerning the cultural legacies, namely the social capitals, from the past and their significant and continuing implications for financial development. In this way, the thesis sheds light on the study of financial development, financial behaviour, corporate finance, and household finance.