The Correlation between Human Capital and Morality and its Effect on Economic Performance: Theory and Evidence

David J. Balan, Federal Trade Commission
Stephen Knack, World Bank

Abstract

We incorporate morality--defined as lower utility from consuming goods obtained through appropriative rather than productive activities--into a simple static general equilibrium model in which agents choose whether to be producers or to be appropriators. We analyze the relationship between the correlation between morality and human capital on the one hand and aggregate economic performance on the other. We show that there is a main effect that tends to cause this relationship to be positive, and that there can be secondary effects that can either reinforce or oppose (or even overbalance) the main effect. We test the theory using the World Values Survey as a source of proxies for morality, borrowing the regression framework of Rodrik, Subramanian and Trebbi (2004). Using our preferred proxy, we find evidence that higher within-country correlation between morality and ability, holding constant the levels of morality and ability, increases per-capita income levels. Under our preferred specification, a one-standard-deviation increase in the correlation between morality and ability raises the log of per-capita income by about one-fourth of a standard deviation, equal to approximately $3600 for the median income country in our sample. Results are robust to correcting for endogeneity and to changes in sample and specification. Results are mixed when we use alternative morality proxies, but the coefficient on the morality-ability correlation is still usually positive and statistically significant.