International Trade and the Persistence of Cultural-Institutional Diversity

Cultural and institutional differences among nations may affect the ratios of marginal costs of goods in autarchy and thus be the basis of specialization and comparative advantage as long as these differences are not eliminated by trade. We provide experimental and historical evidence motivating a model of the joint dynamics of preferences and institutions under autarchy and trade. We show that: i) specialization and trade may arise and enhance welfare even when the countries are identical other than their cultural-institutional equilibria; ii) economic integration does not lead to convergence, it reinforces the cultural-institutional differences upon which comparative advantage is based and may thus impede even Pareto-improving cultural-institutional transitions; and iii) the distributional impact of convergence to superior culture and (domestic) institutions differs from the impact of the removal of barriers to trade such that under plausible conditions the welfare of workers is enhanced by a cultural institutional transition but not by trade integration, while the reverse is true for employers.