Abstract:
Building on research that addresses why some financial systems are based on banks and others on markets, this study stresses that culturally-based social preferences regarding uncertainty avoidance help explain cross-national differences in financial system configuration. We propose a theory in which political institutions condition this relationship. National culture is a good predictor of financial systems as long as governments are constrained and therefore able to credibly commit to not interfering in the functioning of banks and markets. We adopt a strict definition of culture that focuses only on inherited dimensions, while postulating uncertainty avoidance as a proxy for the societal attitudes that channel those cultural priors. We find that in a political context with unconstrained government, national culture fails to explain financial system variation. In contrast, when political institutions limit governmental action, culturally-driven preferences for uncertainty avoidance affect significantly financial configuration.