Measuring Social Capital: Culture as an Explanation of Italy’s Economic Dualism

The paper presents a quantitative test of the oft-repeated view that Italy’s backward and poor South suffered from low “social capital”, a tendency to defect from co-operative engagements. The problem with such assertions is that they run the risk of taking as evidence in favour of the hypothesis the very observations that need to be explained. The analysis carried out in this work tries to break out of this impasse by analysing the conditions under which it was ex ante welfare-improving for farmers in early 20th century Italy to join an unlimited liability rural co-operative bank which would give them access to cheaper credit but also exposed them to the risk of their neighbours’ defection. These co-ops are a prime testing ground for the cultural explanation in that they spread rapidly throughout Northern Italy in the late 19th century, but never gained a similar popularity in the South. I estimate the switching function for these co-ops in different parts of the country to test whether Northern and Southern farmers faced significantly different choice sets when making the decision to join. Identical choice sets but differential responses would of course favour the cultural explanation of the South’s backwardness. The results suggest that for the same parameter values, the choice sets for North and South were different, though whether this difference was large enough to explain the full difference in responses is not completely clear.