Cross-Cultural Trade and Internal Institutional Stability

Abstract

Traditional trade theory maintains that international economic integration always yields potential welfare benefits. This result can however be maintained only in a world bereft of its institutional and cultural dimensions. In this paper we show that, once institutional factors are introduced, integration may be detrimental to welfare. 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, intercommunity integration may trigger the demise of the pre-existent internal arrangements. Second, the collapse of the domestic institutional equilibrium can lead to a loss of welfare for the community as a whole.