Are there Cultural Determinants of Entrepreneurship? (Case of Marwaris, Tamilians, Andhraites)

A nice paper from Rajkamal Iyer and Antoinette Schoar of MIT.

They set up an experiment in Chennai, Tamil Nadu to figure whether and cultural aspects impact business. They test this across three communities – Marwari, Tamilian and Andhraite to point to community differences:

This paper explores the importance of culture in determining contractual outcomes. We  set up a field experiment in India where we send shoppers from different communities to  contract with wholesalers (who also belong to different communities) in the pen industry.  We find that entrepreneurs from different communities vary in how they conduct  business and negotiate contracts. Wholesalers from the Marwari community, who are  considered the most entrepreneurial community in India, offer lower prices and smaller  upfront payment than wholesalers from other communities. We also find that prices are  lower when there is a community match between the shopper and wholesaler. But there is  no difference on the level of upfront payment. Our results suggest that culture is an  important factor in explaining differences in contract negotiations.

They explain the experiment really well and how they looked at really small issues to try and make the experiment random.

Community-wise findings are interesting:

First we find large differences in how entrepreneurs from different communities conduct  business. In the negotiation between shoppers and wholesalers, Marwari wholesalers offer  significantly lower prices than Tamilian or Andhra wholesalers. Not only is the final price per  pen lower but the starting offer of the negotiation is lower in Marwari establishments as well. So  the observed lower prices for Marwari wholesalers are not an outcome of poor bargaining on the  side of the wholesaler, but seem part of a deliberate strategy. In contrast wholesalers from  Andhra Pradesh offer significantly higher prices at the start of the negotiation and also as a final outcome. Offering a higher price upfront increases short term profits but can jeopardize the long run business interest if the wholesaler gets a reputation for high prices. Therefore offering a  lower price can be interpreted as foregoing current profits in order to build a business  relationship (or reputation with the client) for the future.

Secondly we compare business interactions where wholesalers and shoppers are matched across and within cultural or ethnic groups. We find that on average wholesalers offer lower prices  when there is a match. But we do not find a significant difference in the upfront payments if there is a match. These results suggest that wholesalers favor member from their own community but they do not seem to “trust” them more in the form of requiring lower upfront payment. The reason for this difference in treatment could stem either a form of taste based discrimination  where wholesalers give better deals to people of their own community since they enjoy the  interaction more or have greater ease at communicating. An alternatively interpretation suggests that the discount can be seen as an outcome of an implicit norm to treat people from your own community more “fairly”. A slightly different version of this interpretation is that wholesalers might feel that people from their own community are more likely than other ethnic groups to return to the wholesaler for more business if they are treated well. So the discount can be seen as an upfront investment in a long term relationship. But here as well the underlying assumption is that within group norms facilitate interactions even when social sanctions are not available. 

Finally, we present some result that support the idea that a simple preference based discrimination story does not seem consistent with our findings on the match variable. To test whether buyers and wholesalers enjoy the business interaction more if there is a match between communities we measure a number of “soft factors” such as pleasantness of facial expressions, whether refreshments were offered, whether the participants were willing to talk about their home town (which in India is often seen as a way to signal closeness to another person). However we do not find that these dimensions vary if there is a match in community between buyer and wholesaler. In light of these findings it seems less plausible that the observed in-group favoritism is simply driven by the fact that entrepreneurs enjoy interactions with their own community more. But rather it seems to point towards a tacit understanding about how to treat member from the same community.

🙂

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