Do Culture and Law Interact? Evidence From Business Regulation

Abstract

ABSTRACT Countries with individualist cultures tend to adopt fewer business regulations. In this paper, we investigate how individualism affects regulation by incorporating the role of legal institutions. We hypothesize that a common law legal tradition is more responsive to cultural preferences than a civil law tradition. Consequently, we anticipate that individualism and common law interact as complements, reducing the intensity of regulating businesses. Using data from the Integrated Values Surveys for individualism and the World Bank's Doing Business Project for regulation, we find that the impact of culture on regulation is significantly amplified in common law countries, decreasing regulation in individualist countries but increasing it in collectivist ones. This holds across types of regulations and is robust to various controls and instrumental variable analysis. Additional tests show the interaction is stronger in court‐involved regulations and mediated by judicial review, supporting common law's relative adaptability. These findings align with the theoretical proposition that culture shapes regulatory preferences, while legal institutions determine the extent to which these preferences translate into policy outcomes. Furthermore, our findings refine legal origins theory, emphasizing common law's cultural sensitivity rather than inherent superiority.

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