Pod A Conference Room
Seminar
  US Mountain Time

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Marianna Belloc (University of Rome) and Samuel Bowles (Santa Fe Institute)

Abstract.  Specialization and trade may occur even in the absence of differences in factor endowments or technologies as a result of differences among nations in culture (preferences including social norms, such as a work ethic) and institutions (contracts). Where contracts are incomplete, the form of contract that maximizes profits will depend on preferences, and in turn the payoffs associated with different preferences depend on the distribution of contracts. As a consequence of the resulting strategic complementarities between contracts and preferences, there may be a multiplicity of cultural-institutional conventions. We model the endogenous evolution of both culture and institutions in which transitions between these conventions occur as a result of decentralized and un-coordinated contractual or behavioral innovations by employers or employees. In a 2x2x2 trade model we then show that: (i) because goods differ in the kinds of contracts that are appropriate for their production, cultural-institutional differences support differing competitive prices in autarchy, and so provide the basis for specialization and comparative advantage; (ii) the resulting gains from trade raise the cost of deviations from the prevailing conventions and, as a result, if the absolute advantage of the richer country is sufficient, trade will impede transitions to the superior convention; and (iii) by contrast, by reducing the cost of innovating, international mobility of factors of production facilitates convergence to superior cultural-institutional conventions.

Purpose: 
Research Collaboration
SFI Host: 
Sam Bowles