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International Trade, Factor Mobility And The Persistence Of Cultural-institutional Diversity

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Executive Summary

The authors present a model in which specialization and trade occur not as a result of exogenous differences in factor endowments or technologies, but because of endogenous differences in culture (preferences including social norms) and institutions (contracts). Goods differ in the kinds of contracts that are appropriate for their production, and so strategic complementarities between contracts and the nature of social norms may result in a multiplicity of cultural-institutional equilibria that provide the basis for comparative advantage and specialization. In the evolutionary model of endogenous preferences and institutions under autarchy, trade and factor mobility, transitions among multiple asymptotically stable cultural-institutional conventions may occur as a result of decentralized and un-coordinated contractual or behavioral innovations by employers or employees.

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