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Wealth of Nations vs. Identity of Nations: Gains from Trade and the Erosion of Social Cohesion

Author

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  • Nicolas Dietl
  • Sebastian Krautheim

Abstract

We interpret the increased polarization in Western societies over global economic issues as an interaction of economic forces and shifts in a society’s social identity equilibrium. We combine social identity theory with standard small open economy model of international trade to study the effect of economic globalization with a bias towards "unethical" production. Starting from a social cohesion equilibrium where all consumers identify with society at large, we find that a falling price of the unethical variety leads to an erosion of social cohesion and can ultimately lead to a polarized social identity equilibrium where caring consumers are estranged from the society they live in. We show that this form of economic globalization is not only not always a Pareto improvement, but may even lead to aggregate welfare losses.

Suggested Citation

  • Nicolas Dietl & Sebastian Krautheim, 2026. "Wealth of Nations vs. Identity of Nations: Gains from Trade and the Erosion of Social Cohesion," CESifo Working Paper Series 12503, CESifo.
    • Handle: RePEc:ces:ceswps:_12503
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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F68 - International Economics - - Economic Impacts of Globalization - - - Policy

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