Values and Economic Performance: A formalised agent-based model

The aim of this project is to develop an agent-based computer simulation model that represents the relation between culture, institutions, values and economic performance, and explains how this relation changes over time. This model will be used to explain why there are long-lasting differences in economic performance and wealth between countries. Despite many political efforts to foster economic development, convergence between countries is slow. This is also true within the European Union, where the Eastern and some Southern countries are still significantly poorer than the core. A formal economic model that combines the mentioned aspects does not exist so far. The long-run economic performance of countries cannot be understood without taking institutions and culture into account, which is shown by many empirical papers. Theoretical studies in economics focus either on the role of institutions or of culture, but not both, and values are neglected. However, culture and institutions are interdependent and should be considered jointly. We aim at unifying separate strands of literature in economics, sociology and social psychology. There is little formal modelling in the literature on these topics. Formal modelling is desirable, because it helps to clarify the precise interpretation of similar concepts and it allows to make predictions what might happen if some factors change. Our approach is innovative, because it uses insights from other social sciences and translates them in the language of economics. Our model uses three building blocks. The first component consists of public goods games in economic networks. Agents that are linked in a network produce a joint output by combining different skills and effort. In the second building block from the sociological literature, we interpret social capital as the connections of individuals within a network. The structure of the network can be related to formal and informal institutions that determine the interaction of the agents. Finally, we incorporate culture via the Schwartz theory of human values from social psychology in order to explain how networks change and why agents cooperate. We assume that agents that share values are more likely to establish links in a network. In the long run, values can change in response to the outcomes of the cooperation. The collaboration between the German and Polish researchers is crucial for the success of the project. The German team has strong experience in integrating the relevant social psychological theory and human subject behaviour in formal economic models. The Polish team has experience with the economic modelling of social capital theory and econometric analysis of empirical data. Both teams have a profound knowledge in the development and statistical analysis of agent-based computer simulation models. The German-Polish perspective allows us to develop and use the model based on the significant cultural and economic differences in both countries.