Do Culturally Embedded Political Leaders Help or Hinder Economic Development?

Previous research presents conflicting views on whether cultural similarities between state officials and the societies they govern promote or hinder economic growth. We posit that cultural embeddedness can facilitate local growth by reducing the transaction costs for alleviating the credible commitment problem, thereby efficiently diminishing the uncertainty for production and investment. Using linguistic similarity as a proxy for cultural embeddedness, we find that the Chinese municipalities governed by political leaders whose cultural background is similar to that of the local society exhibit significantly stronger economic growth. Further, the appointment of a new political leader typically dampens business performance due to local enterprises’ inclination to avoid risks, but this effect is absent when the incoming leaders are culturally embedded. We also demonstrate that in the institutional setting of modern states, cultural connection serves as a “weak tie” that efficiently facilitate state-society communication of credible commitment, but are inadequate to foster corruption.