Cross-Cultural Trade and Internal Institutional Stability
Traditional trade theory obtains that international integration always yields large potential welfare benefits, even in a static constant returns competitive economy. Such a result however can only be maintained in a world bereft of its institutional and cultural dimensions. In this paper we show that once institutional factors are introduced into the discussion, integration may be detrimental to welfare in the long-run. Exploiting a game theoretical approach, we consider the integration between two societies that only differ in their institutional structures. Two important results are derived. First we illustrate that intercommunity integration may entail the disruption of the pre-existent internal arrangements in at least one of the two societies. This is crucial especially because in our model institutional diversity is the only reason that makes intercommunity integration profitable. Second, in the presence of gains from internal cooperation, the collapse of the domestic institutional equilibrium leads to a loss of welfare for the community as a whole.
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