Keywords

Cultural diversity; Cultural transmission; Trade; Globalization

JEL Classification Codes

F02; F10; Z10; Z13

17.1 Introduction

Globalization and revolutionary developments in information and transport technology are changing the current world (Cowen, 2002). Our daily lives are increasingly governed by products and images originating from other countries and other cultures. Political, religious, cultural, or economic trends emerging in a particular region, group, or time period are now being echoed in large parts of the world. Countries and regions are getting interconnected through various socioeconomic (real or virtual) networks that span over the entire globe (Nederveen Pieterse, 2004).

This process of international integration¹ and globalization can generate efficiency gains in production and consumption through access to an increased variety of goods and services. The emergence of a global consumer market has arguably induced rapid changes in consumption patterns, from toothpaste to refrigerators, and led to the spread of global ‘brand-name’ goods (UN Development Programme, 1998, p. 46). On the other hand, the mass consumption of standardized goods, eased by international trade and foreign direct investments, might crowd out self-produced, traditional, and locally manufactured goods in cultural and other related sectors, inducing in turn a loss of cultural identity.

Some striking evidence about the fears associated to globalization comes from France: more than 60% of Frenchmen agree that globalization represents the greatest threat to the French way of life (SOFRES, 1999; Meunier, 2000), and 19% of respondents in a 2005 TF1 poll said that they voted against the European constitution because Europe is perceived as a threat to the French cultural identity. However, the French fear of cultural erosion is not unique in Europe as documented, for example, by the collection of newspaper articles at the website of Global Policy Forum.^2,3 The fear of cultural erosion and loss of cultural diversity is also suggested by some formal empirical studies like, for instance, Mayda and Rodrik (2005). Using a unique dataset from the International Social Survey Programme covering over 20 000 individuals located in 23 countries they find that attitudes toward trade are significantly correlated with levels of human capital; more interestingly, however, they also find that non-economic determinants, in the forms of values and identities, play an important role in explaining the variations of preferences over trade integration. In particular, high degrees of neighborhood attachment and nationalism/patriotism seem to be strongly associated with protectionist attitudes.

The idea that trade integration can substantially affect patterns of cross-national cultural diversity applies as well within countries at the regional level. Cross-regional trade and economic activities are important determinants of economic development, and consequently interact with local cultural specificities and attachments. This is, for instance, exemplified by strong linguistic cleavages in bilingual countries such as Belgium or Canada. It may even be more relevant for multiethnic African countries such as Cameroon with 279 languages, the Democratic Republic of Congo with 217 languages, or Nigeria with 521 languages, where each language tends to represent one tribe with its specific cultural meanings and mechanisms of cultural transmission.

Beyond case studies, the empirical literature on trade, globalization, economic integration, and culture is yet inconclusive.⁴ On the one hand, the idea that trade and globalization are associated with reduced cultural diversity is consistent with some evidence suggesting convergence of consumption patterns across countries. For instance, looking specifically at consumption of wine relative to beer in a dataset of 38 countries from 1963 to 2000, Aizenman and Brooks (2008) find a clear convergence effect on consumption patterns, occurring more quickly within groups of countries that have a higher degree of integration. Gracia and Albisu (2001) also find homogenization effects of food consumption patterns across EU countries in recent years. Kónya and Ohashi (2007) consider the effect of economic integration on product-level consumption patterns across the Organization for Economic Cooperation and Development in the decade 1990–2000 and also document evidence of strong convergence in cross-country consumption patterns with substantial heterogeneity across product types.

On the other hand, other studies suggest that the fear of loss of local cultural diversity may be exaggerated. For instance, Disdier et al. (2010) use a long panel of French birth registries to assess the media-culture link using name frequencies as a measure of tastes. Controlling for unobserved name effects, their analysis indicates that foreign media do influence name choices, but only modestly: absent their existence, fewer than 5% of French babies would have been named differently. Moreover, their welfare simulations point to welfare gains due to exposure to both domestic and foreign media, enlarging the set choice of names for parents.

While there has been much discussion in the public debate on the interdependence of globalization and culture, it is only recently that international economists have started to formally discuss these issues and include them in their models. The purpose of this chapter is to provide a first overview of this emerging economic literature and to present an approach that integrates recent cultural evolutionary models into standard economic supply-side trade models. We hope that such a perspective may be useful to provide formal analytical and empirical economic analyses of the links between economic integration, trade, globalization, and the dynamics of cultural diversity.

The chapter is organized as follows. In Section 17.2, we start with a discussion of recent theoretical economic perspectives on the impact of international integration on cultural evolution. In Section 17.3, we expand a simple economic approach of cultural transmission and socialization that we have been developing in the last decade or so to analyze dynamic changes in preferences and their interactions with socioeconomic activities (Bisin and Verdier, 2001, 2010). This approach is then integrated in Section 17.4 into several standard models of international trade. Such a perspective allows us to focus on the central question we aim at addressing, namely the relationship between trade and cultural diversity across countries. In particular, we discuss how trade flows may lead to convergence of cultural values towards common patterns over the world. Section 17.5 finally concludes with areas for future research on this topic.

17.2 Theoretical Perspectives on International Trade and Cultural Diversity

Traditional economic theory assumes that individuals have well-defined and fixed preferences over material goods, and that economic transactions are frictionless. In such a world, economic interactions are perfectly orthogonal to cultural issues. In order to understand the debate around trade, globalization, economic integration, and cultural diversity, however, one has to depart from these basic assumptions.

17.3 Dynamic Cultural Transmission Models

In Rauch and Trindade (2009), Bala and Van Long (2005), and Belloc and Bowles (2011), the cultural dynamics are driven by an exogenous process directly imported from the Darwinian literature in biology. This replicator dynamics approach describes selection mechanisms on preferences in an essentially black-box way. While useful as a first step, however, this approach leaves open the precise mechanisms through which international integration actually affects cultural diversity. It also makes it difficult to provide cultural policy implications about the costs and benefits of cultural diversity in a globalized context. To have insights on such questions, it seems useful to construct models that provide precise micro-foundations for the evolutionary processes that affect cultural change and how these interact with international integration. In the recent decade, building on models of cultural transmission originating from evolutionary anthropology and population dynamics literature (Cavalli-Sforza and Feldman, 1981; Boyd and Richerson, 1985), economists have started to develop formal frameworks of cultural evolution in contexts where socioeconomic activities are likely to interact with preference changes. In this section, we review these perspectives.

17.4 Cultural Transmission and Competitive Economic Exchange

A first natural way to investigate how globalization (and more specifically trade) interacts with cultural diversity is to consider how individual preferences may evolve when economic agents interact and exchange in the standard general equilibrium framework of competitive markets. In trade theory such models provide the usual supply-side comparative advantage explanations for patterns of production and exchange between communities or countries. Importantly, when preferences are endogenous and can be transmitted over generations, such contexts also give rise to social strategic substitution effects in cultural transmission, due to the standard Walrasian price effects that obtain on demand.

The following simple exchange economy with two goods, l = 1, 2, illustrates the argument. The economy has a population of individuals whose size is normalized to L = 1. Agents have all the same individual endowment vector ω = (ω_l)_l=1,2 but they may differ in their preferences over the two goods: agents of type i = A do prefer good 1 (respectively, good 2) more (less) than agents of type i = B. To fix ideas consider simply that preferences are given by:¹¹

Hence, individuals of type A (respectively, of type B) only care about good 1 (respectively, good 2). The price vector of the two goods is (p_l)_l=1,2. Without loss of generality we can fix good 1 as the numéraire and denote p = p₂/p₁ the relative of good 2 relative to good 1. The Walrasian demand functions for the two types of consumers are immediate and given by:

In a given generation period t, let the fraction of individuals of type A and type B be, respectively, and . Then the market clearing relative price of good 2, p, will be determined by the market clearing condition:

(17.5)

which gives:

It is clear that p(q_t), the equilibrium relative price of good 2, is a decreasing function of q_t as individuals of type A prefer good 1.

The cultural intolerance parameters for cultural transmission by a parent of type i living in period , for i = A, B can also be obtained immediately:

where is the parent’s expected equilibrium consumption pattern of a child of type i in his/her adult life (i.e. in period t + 1); and is the expectation that parents of time t have on the fraction of individuals prevailing in period t + 1 when their children will be grown up. Various assumptions may be made on how parents form expectations about the society in which their children will live. To make things simple, assume that those expectations are myopic in the sense that .¹² Hence:

Simple inspection shows that ΔVⁱ(qⁱ) is decreasing in qⁱ and therefore social strategic substitution obtains. The reason is simply that the larger the fraction of a specific preference structure biased towards a given good in the population, the larger the aggregate demand for that good and, consequently, the higher the relative price of that good in the Walrasian competitive equilibrium. This price effect in turn makes it less beneficial for parents to transmit such preference profiles to their children, leading therefore to social strategic substitution.

Following this, the dynamic equation driving the evolution of preferences in the community is given by:

with:

It follows immediately that cultural heterogeneity will be preserved. As a matter of fact, the interior stable steady state fraction q^*∈(0,1) of individuals of type A in the population is given by the condition d^A(q^*) = d^B(q^*), giving therefore:

Two features are worth noting. First, because of cultural transmission, the steady-state distribution of preferences in the population depends on supply-side elements of the economy, here the initial endowment vector of each individual. Hence, the demand side of the economy in the long run is affected by supply-side fundamentals. This dimension is therefore reminiscent of Marxist materialism, and the idea that tastes and preferences are affected by the materialistic components of the environment in which such preferences evolve.

Second, note that depends only on relative endowments and is increasing in ω₁/ω₂. This last feature provides a rationale for the existence of the so-called home-bias effect on preferences whereby preferences will be biased towards the goods that the economy produces in abundance. In the present context of our simple exchange economy, the more abundant the relative endowment of good 1, the more abundant will be the long-run fraction of individuals of type A with strong preferences for good 1. The intuition for this result is simple. Owing to the standard Walrasian price effects, the more abundant the endowments and supply of good 1 in the economy, the smaller its equilibrium relative price in competitive markets. This in turn increases the perceived benefit for parents of type A to transmit their trait (biased towards the consumption of the cheaper good 1) to their children compared with parents of type B. This differential effect of the relative price of good 1 on cultural transmission efforts leads to a higher transmission rate of trait A compared to trait B, leading in the end to a larger steady-state proportion of individuals with preferences for good 1 in the population.

This model can then be easily extended to a two-country exchange economy model in which there is international trade and preferences for the two goods 1,2 are again transmitted across generations along the previous processes. Denote, for instance, the two countries as H and F for home and foreign. Within each country h = H, F, there is a population of size L^h such that all agents have again in their adult life the same individual endowment vector over the two goods 1 and 2. Denote then the fraction at time t of adult agents of type i = A in country h. The Walrasian demand functions for each type of consumer (A and B) in each country h is immediate. Under free trade across countries, the market clearing relative price of good 2, p, can be computed to satisfy:

The cultural intolerance parameters will then be written as:

Studying the resulting dynamic equations of cultural transmission in the two countries, we obtain that steady states must satisfy:

It follows immediately that the interior steady state is symmetric across countries q^H = q^F = q^T* with q^T* given by:

where and are the aggregate endowments of good 1 and 2 in the aggregate economy. Note again that the long-run steady-state fraction of individuals of type A that prevails in both economies H and F is positively related on the relative world aggregate value of endowments . From this we derive two interesting features. Assume that before trade integration, each economy h = H,F had settled on its autarkic long-run cultural steady state:

Then trade integration leads to cultural convergence in terms of preference profiles across the two economies. Indeed, suppose to fix ideas that:

namely that country H has a comparative advantage in good 1 (and conversely country F has a comparative advantage in good 2). Note that this translates immediately in , namely that each country has a home-bias consumption profile in the good in which it has a comparative advantage. It follows then that and therefore that:

In other words, after trade integration and convergence towards the same global pattern of preferences, each country has preferences less biased towards its comparative advantage good. Country H has a lower fraction of individuals that prefer good 1 than under autarky, while country F has fewer individuals that prefer good 2. In this simple setting, international trade leads to cultural convergence across countries and simultaneously reduces endogenously the home-bias effect of preferences in the two countries.

17.5 Factor Endowments, Trade, and Cultural Convergence

While the details of the previous results are obviously dependent on the specificity of our exchange economy example, the qualitative result that trade under competitive conditions tends to preserve within-country cultural diversity and is potentially an important driver of cultural convergence across countries should be more general. In particular, the previous logic applies equally to production economies with increasing marginal costs.

An interesting case is, for instance, the standard Heckscher–Ohlin model where the source of competitive international trade across countries comes from differences in factor endowments. More precisely, assume a two-country world with countries h = H, F, two goods i = 1, 2, and two factors of production capital K and labor L. In each country h, production is obtained under competitive conditions, using standard constant return to scale convex technologies. To fix ideas, good 1 is assumed to be more capital intensive than good 2. Take good 1 as the numéraire and denote p the relative price of good 2. Denote also by w and r the factor prices associated to labor and capital.

In each country h, the population of size L^h is composed of individuals, each endowed with one unit of labor and K^h/L^h units of capital. Again they may differ in the terms of their preferences over the two goods: agents of type i = A prefer good 1 (respectively, good 2) more (respectively, less) than agents of type i = B. We assume that preferences are homothetic:

where is an increasing strictly concave function satisfying the appropriate Inada conditions. Also we assume that:

so that the marginal rate of substitution between good 1 and 2 is higher for consumers of type A than of type B.

Marshallian demands are given by:

where I^h = rK^h/L^h + 1 is individual income in country h and is the solution of .

In the Appendix Proposition A1 we show the following result:

Under standard assumptions, at an autarchic equilibrium in country h, the relative price of good 2 at equilibrium, , is unique, decreasing in , and increasing in K^h/L^h.

Furthermore, the cultural intolerance parameters for cultural transmission by a parent of type i living in period t in country , for i = A, B and h = H, F, are:

Again one may look for the transmission of preferences under autarky in each country h. It will be again given by the dynamic equation:

(17.6)

evaluated at optimal direct socialization levels in country h at time t, .¹³

The steady-state distribution of preferences under autarky is given by the condition d^A = d^B:

(17.7)

Note that the cultural intolerance parameters depend on q^h only through the effect of q^h on good 2 equilibrium price p = p(q^h/1 − q^h,K^h/L^h). Obviously, the nature of the cultural steady states as characterized by (17.7) depends on whether social strategic substitutability or social strategic complementarity prevails.

In general, the sign of is indeterminate. Indeed, the two effects are going in opposite directions. To see that, consider, for instance, the individuals of type A. As such agents have an optimal pattern of consumption biased towards good 1, an increase in the relative price of good 2 makes it better for such individuals to see their children adopting also a profile of consumption biased towards good 1 rather than good 2. This effect tends to increase therefore their paternalistic gain of transmitting their trait ΔV^A, h. On the other hand, as p increases, even agents of type B tend to substitute their consumption away from good 2 and to adopt a profile of consumption that is biased towards good 1 and therefore closer to the optimal profile of agents of type A. This effect tends to decrease the cost to parents of type A to expect their child to be of the other type B, which in turn implies a reduced value of ΔV^A, h. When the substitution possibilities across goods are not too large and agents of type B cannot adjust too much their behavior in response to a change in p, the second negative effect is outweighed by the first positive effect and ∂ΔV^A,h/∂p > 0.¹⁴ Given that the equilibrium price p = p(q^h,K^h/L^h) is a decreasing function of q^h, it follows that ∂ΔV^A,h/∂q^h<0 and social strategic substitutability prevails for group A.

A symmetric argument implies that, when the substitution possibilities across goods are not too large and agents of type A cannot adjust too much their behavior in response to a change in p, ∂ΔV^B, h/∂p < 0. As the equilibrium price p = p(q^h, K^h/L^h) is a decreasing function of q^h, it follows that ∂ΔV^B, h/∂q^h = −∂ΔV^B, h/∂(1 − q^h)>0 and again social strategic substitutability prevails for group B. In the Appendix Proposition A3, we provide more details on these effects.

When social strategic substitutability prevails for both groups, the right-hand side of (17.7) is an increasing function of q^h. Given that the left-hand side is decreasing in q^h and taking value 0 at q^h = 0 and ∞ at q^h = 1, Eq. (17.7) defines a unique solution:

As is increasing in K^h/L^h, it follows that is an increasing function of the relative factor endowments K^h/L^h. The profile of the demand side at the cultural steady state depends on fundamentals from the supply side. Typically, in this Heckscher–Ohlin model context, one gets the equivalent of a Rybczynski theorem on cultural profiles:

Rybczynski theorem on cultural patterns: when social strategic substitutability prevails in cultural transmission, an increase in a given factor endowment leads to an increase in the long-run fraction of individuals that have preferences biased towards the good using relatively intensively that factor of production.

In other words, a country that is relatively well endowed with capital K^h/L^h tends to have a larger long-run fraction of individuals that have a preference structure biased towards the good using relatively intensively capital. As we assume that good 1 is more capital intensive than good 2, this means that preferences of type A are going to be in higher frequency in the cultural steady state (i.e. is increasing in K^h/L^h). Again, this result also suggests that there will be a natural home bias in preferences towards goods that can be produced relatively cheaply locally and therefore in which the country is likely to have a comparative advantage.

Consider now the effect of international trade between the two countries. To fix ideas, suppose that factor endowments are such that:

Hence, country H has a comparative advantage in good 1 and conversely country F has a comparative advantage in good 2. Also from the previous discussion, assuming again that social strategic substitutability prevails, we get that:

We assume that preferences have converged to such values in each country before opening the economies to free trade. Moreover, consider the traditional case where factor endowments are such that factor price equalization prevails under free trade. In each period the international relative price of good 2 is such that the world relative aggregate demand for good 2 equals world relative aggregate supply. It turns out that the world equilibrium price satisfies:

which is decreasing in the first argument (as θ^A(p)>θ^B(p)) and decreasing in the second argument because good 1 is capital intensive and good 2 is labor intensive.

The analytical representation of the cultural dynamics is rather involved, but the interior steady-state distribution of preferences under free trade is easy to characterize. It is given by the condition d^A, h = d^B, h in each country h. Hence:

(17.8)

which implies a symmetric interior steady state such that:

and¹⁵:

Comparing (17.7) and (17.8), it follows that

It can be shown that under social strategic substitutability, this symmetric interior steady state q^T* is locally stable (see Appendix Proposition A4 for a proof). Hence, in the long run, there is convergence of preference profiles after free trade integration between the two regions. In agreement with the Heckscher–Ohlin trade theory, country H, which is relatively well endowed with capital, exports the capital-intensive good. Moreover, after trade integration it has a lower long-run fraction of individuals with preferences biased towards the good that it is exporting (i.e. the capital-intensive good). Conversely, the other country F has a higher fraction of agents with preferences biased towards the capital-intensive good that it is importing. In a sense, through exports of the good in which it has a comparative advantage (and a preference bias), a given country tends to export its preference bias to the other country. Free trade integration leads through this process to preference convergence. The following propositions parallel the standard trade theorems of the Heckscher–Ohlin theory and summarize how international integration driven by factor endowments differences generate cross-country cultural convergence forces.

Heckscher–Ohlin theorem on cultural patterns: when social strategic substitutability prevails in cultural transmission and there is factor price equalization, free trade integration leads a country to transfer to the other country a preference bias towards the good that is using intensively the factor of production it is well endowed with (i.e. the good for which it has a preference bias under autarky).

Cultural patterns equalization theorem: when social strategic substitutability prevails in cultural transmission and there is factor price equalization, free trade integration leads to preference profile equalization across the two trading economies.

Interestingly, the result that all countries converge to the same interior cultural profile q^T*∈(0, 1) is consistent both with the view that international trade integration leads to cross-country uniformity (all countries look the same in terms of their preference profiles) and with the view that trade preserves intra-country cultural diversity of tastes. As we will see, however, the conditions for such a result (social strategic substitutability in cultural dynamics) may be impaired once one allows for group size externality effects on the demand side and/or increasing returns on the supply side of the economy. We now turn to these possibilities.

17.6 Group Consumption Externalities and Cultural Divergence

In the previous models we introduced, there is no externality connecting individual preferences. In the case of cultural goods, it is, however, reasonable to assume the existence of such network preference externalities across agents. Olivier et al. (2008) consider these issues in a model of trade and culture that builds on the previous framework of cultural evolution. In their model, preferences allow for cultural externalities in the sense of Akerlof and Kranton (2000): agents who share a common cultural identity benefit from a positive group externality when they engage in actions deemed appropriate by their culture and socially interact.

More precisely, in Olivier et al.’s (2008) model, two cultural goods are produced with labor L and some culture-specific factor, mixing geographical, climatic, historical, and human capital characteristics; (i.e. a ‘cultural capital’) Kⁱ, where i = A, B then indexes the cultural good. The production function for each good is Cobb–Douglas: with β∈(0,1) and . Factors of production are assumed internationally immobile and in fixed supply. An important feature of the production structure above is that when the relative demand for a good xⁱ increases, the relative price of that good increases as well.¹⁶

Olivier et al. (2008) introduce then cultural identity within agents’ preferences. Each agent belongs to one of the two cultural groups associated to the cultural goods; we let i then index the cultural group as well as the cultural goods. Nonetheless, each agent can consume either of the cultural goods. However, if an agent chooses to consume good x_A, he or she cannot consume good x_B and vice versa. Agents derive utility from individual consumption and, possibly, from social exchange with other agents. Each period, a random matching process takes place and social exchange occurs only if the two agents matched share the same cultural identity, (i.e. consume the same cultural good).

Formally, at time t an agent of culture i who consumes a cultural good i ≠ j, different from their own cultural group, cannot benefit from social exchange and gets a utility level given by:

(17.9)

The expected utility of an agent of culture i who consumes his or her own cultural good is given by:

In summary, . Letting:

(17.10)

we have:

(17.11)

and can be interpreted as the cultural externality associated at date t with the consumption of the good i. Note that the function is increasing, bounded below by 1, and takes value 1 if either the mass of agents of culture i falls to 0 or if SEⁱ = 1.

Finally, preferences evolve through time along a version of a cultural transmission process à la Bisin and Verdier (2001) in continuous time, where the dynamics of are driven by the relative resources spent by parents of different cultures in order to transmit their preferences to their offspring. Denoting by the cultural intolerance for cultural group i, therefore, the cultural transmission dynamics have the following general properties, for i ≠ j:

(17.12)

(17.13)

A steady state is reached when subjective utility costs and thus socialization efforts are equalized across parents of different cultures.

It is useful to consider first the cultural dynamics under autarky in a given country. It is straightforward to see that an agent of culture i strictly prefers to consume good i if and only if , where and are, respectively, the prices of goods i and j ≠ i. This in turn implies that three different equilibrium regimes can exist, depending on the value of the state variable q_i, t:

Olivier et al. (2008) show that the two pooling regimes are incompatible with the long-run dynamics of . Moreover, market clearing equilibrium prices in the interior regime (where both goods are produced and consumed) satisfy the following key equation:

(17.14)

The relative price of a cultural good is then an increasing function of the mass of agents of the corresponding culture.

To solve for the dynamics of , the first step is to derive cultural intolerancies as a function of qⁱ. In the interior regime, the subjective utility costs can be shown to be given by the following expressions, for i ≠ j:

(17.15)

These expressions reflect the two forces that affect cultural transmission. On the one hand, the relative price effect represents a Walrasian price adjustment mechanism that generates a social strategic substitutability effect on the cultural intolerance parameter . On the contrary, the cultural externality effect based on social interaction, induces a social strategic complementarity effect on cultural transmission. To see that more precisely, take for instance agents with culture A and take good A as the numéraire (i.e. ). Then it is easy to see that:

and hence:

The first positive term on the left-hand side relates to the cultural externality and contributes to the social strategic complementarity effect, while the second negative term reflects the relative price effect and contributes to the social strategic substitutability effect. If the cultural externalities (SE^A,SE^B) are not too large, so that under autarky the cultural dynamics are again mainly driven by social strategic substitutability, a unique steady state exists that must be in the interior regime. More precisely, in this case it can be shown that:

and:

(17.16)

or, equivalently, at equilibrium:

(17.17)

which shows how the dynamics of culture result from the two previous effects going in opposite directions. The first effect, captured in the left-hand side of (17.17), is a cultural externality effect: the larger the size of a given culture, the larger the cultural externality and the more parents of that culture have incentives to socialize their children. The second effect, captured in the right-hand side of (17.17), is the relative price effect: the larger the size of a given culture, the larger the demand for the corresponding cultural good, the larger the relative price of that good, and the less parents of that culture have incentives to socialize their children. The relative price effect tends to promote cultural heterogeneity within the society while the cultural externality effect tends to promote homogeneity.

At a cultural steady state, the two effects exactly compensate one another and one gets the long-run equilibrium fraction q^1* of individuals with type 1 solution of the equation:

(17.18)

The long-run profile of preferences depends on supply-side fundamentals such as the two cultural capital stocks K₁ and K₂. Typically, domestic preferences will be (endogenously) biased towards the cultural good produced in relative abundance in the economy. Furthermore, the preference profile will also depend on the shape of the cultural externalities and social interactions between individuals (i.e. the shape of the social matching functions I^A(.) and I^B(.)). Also, these two dimensions will act as complements on the preference bias.

More importantly, these two supply-side fundamentals, when affected by international integration, may have different implications for the cultural dynamics in the world economy. Specifically, Olivier et al. (2008) consider two globalization mechanisms: international trade in cultural goods driven by differences in factor endowments and international social integration generated by international social matching across borders.

17.7 Increasing Returns, Market size effects, and Cultural Dynamics

The previous analysis highlights the importance of social strategic complementarity effects on cultural transmission through the channel cultural consumption externalities and social interactions. As discussed, this provides a channel through which international trade integration leads to cultural homogenization within and across countries. Social strategic complementarities and cultural homogeneity in trade economies also typically hold when there are increasing returns in production and market power (something that seems to be particularly prevalent in cultural industries such as the media, TV, and other movie entertainment industries).

Maystre et al. (2009) provide a simple framework illustrating these issues. They analyze the transmission of a preference for specific differentiated goods whose varieties are produced under monopolistic competition. In this context, the larger the size of the group with a preference for a specific good, the larger the market size and the entry of firms producing differentiated varieties of that good. Increased varieties in turn make it relatively more attractive to acquire and transmit preferences for this good, leading once again to social strategic complementarity in cultural transmission.

Specifically, the theoretical framework has three building blocks. The first block corresponds to a standard economic model à la Krugman (1979) where firms produce differentiated products under monopolistic competition. Assume, for instance, that there are again two cultural types, A and B. Associated to these cultural types are two types of goods and two types of individuals, A and B. At a date t, type i agents represent a share of the population, for i = A, B. Agents have the following preferences:

(17.20)

Composite goods A and B are differentiated into, respectively, a number N^A and N^B of varieties and in a Dixit–Stiglitz way: , where σ > 1 is the elasticity of substitution. Each agent supplies one unit of labor in a competitive labor market at a wage rate normalized to w = 1. Given symmetric variety prices associated to the same cultural type i = A, B, standard computation yields aggregate demands for the different varieties:

(17.21)

where is the aggregate price index for each composite good i = A, B.

The second building block ties products to culture. Building on a large marketing and consumer research literature, Maystre et al. (2009) assume that individuals are endowed with different clusters of cultural values and that these cultural values can be tied to consumption varieties. Typically, upon entry, firms anchor their product to a cultural type, A or B, and a fixed labor cost F must be paid to start production. Then the production of one unit of product requires one unit of labor. Monopolistic competition prevails on the product market. Entry and exit (and therefore the number of varieties N^A and N^B that are tied to a particular cultural type) adjust instantaneously within each period t, so that profits are equal to 0. This captures in a stylized way the idea that cultural transmission and evolution of preferences across generations takes more time than market structure adjustment.

Finally, the last block of the framework is a micro-founded model of cultural transmission à la Bisin and Verdier (2001) where the dynamics of cultural traits derive from parental socialization efforts driven by the relative importance of the cultural subjective utility costs ΔV^A and ΔV^B.

As usual, the model is solved in two stages. In a first stage, Maystre et al. (2009) derive the product market equilibrium with free entry for a given distribution of preferences (i.e. for a given ). This provides the equilibrium number of varieties at each date. As usual in monopolistic competition frameworks, there is a market size effect: a larger fraction of individuals of culture A (respectively, B) implies a larger market size for good A (respectively, B), which in turn promotes entry of type A varieties (respectively, B).

The equilibrium dynamics of are then analyzed with the characterization of the utility cost functions ΔVⁱ, for i = A, B. Social strategic complementarity effects are shown to prevail. Indeed, because of the taste for variety embodied in the Dixit–Stiglitz preference structure, it is easy to see that for both cultures i = A, B the cultural intolerance parameter ΔVⁱ is an increasing function of the number of produced varieties Nⁱ associated to that cultural good i (i.e. the cultural good preferred by agents of culture i). Owing to the market size effect, this in turn is an increasing function of the fraction of individuals of culture i implying that:

As such, this effect generates a force for cultural homogenization inside the society.

Maystre et al. (2009) then consider trade integration between two identical economies. They assume that there are two idiosyncratic cultural types, A and A^*, which are specific to the domestic and the foreign country, and a cultural type, B, which is common to both countries. Correspondingly, the economy has three goods, A, A^*, and B. At equilibrium, type A goods are consumed only in the domestic country, type A^* goods are consumed only in the foreign country, and type B goods are consumed everywhere.

Again, because of market size effects, the relative number of type B varieties is larger under trade integration than under autarky. Now interestingly, this effect is reinforced by a feedback effect from the cultural dynamics on aggregate demand. Indeed, in each country, a higher value of N^B implies a higher relative intolerance ΔV^B compared to the idiosyncratic cultural types, A and A^*. This in turn induces a shift in cultural transmission: more socialization effort for parents with the common cultural type B, less effort for parents with the idiosyncratic cultural types A or A^*. This brings down the steady-state value of the fraction of idiosyncratic types A and A^* in the domestic and the foreign country.

As a result, Maystre et al. (2009) conclude that product market integration may lead to a decrease in their bilateral cultural distance, defined as the probability that two randomly picked up individuals in the two different countries do not share the same cultural types.¹⁸ The removal of trade barriers increases the incentives of firms to anchor their products to cultural types common to the two countries. This effect triggers a process of cultural homogenization towards the commonly traded good.

The paper also discusses two other interesting observations. (i) The effect of trade on bilateral cultural distance is larger when the traded goods are more differentiated (i.e. smaller values of σ), as product differentiation drives the strength of the feedback effect. (ii) Owing to the existence of the social strategic complementarity effects on cultural transmission and the fact that cultural dynamics may exhibit multiple long-run equilibria, the impact of trade openness on bilateral cultural distance is characterized by path-dependency. A temporary increase in trade openness may have a permanent effect on the distribution of cultural types in the economy.

17.8 Conclusions

In this chapter we provided a focused overview of the economic literature on the effects of trade, globalization, and international integration on the dynamics of cultural diversity. We concentrated especially on those contributions that allow us to delineate a common analytical framework interacting trade and cultural evolution models. This framework appears successful in that it identifies several fundamental factors that affect the relation between economic integration and the dynamics of cultural diversity, such as the nature of transaction costs, the strength of group and network effects characterizing cultural goods, and increasing or decreasing returns to scale in production.

Various aspects of the analytical framework we introduced can be improved and many extensions are possible. Future research, however, will have a large pay-off when this framework will be put to data and it will start providing empirical answers to the question of the effects of trade, globalization, and international integration on the dynamics of cultural diversity.

Appendix: Proofs of propositions

and:

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