Identity Creating Goods and Free Trade

Gerhard Clemenz

University of Vienna

Gießen, 03.12.2009

1. IntroductionQuestions:

1) Does globalization lead to a crowding out of identity creating (cultural) goods,

2) If so, does this imply a welfare reduction (mainly of small countries) because of free trade.

Examples:

(1) Food (McDonaldisation)

(2) Music

(3) Movies

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Content

1. Introduction

2. Literature

3. Model

4. Autarky

5. Free trade without comparative advantage

6. Free trade with comparative advantage

7. Discussion

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2. Literatur

Akerlof, G.E., Kranton, R.E., 2000. Economics and identity. Quarterly Journal of Economics 115, 715-753. – Not applied to international trade

Janeba, E., 2007. International trade and consumption network externalities, European Economic Review 51, 781-803. – Focus on comparative advantage

Francois, P., vanYpersele, T. 2002, On the protection of cultural goods, Journal of International Economics 56, 359-369. - French vs. Hollywood movies, economies of scale

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Pandey, M., Whalley, J., 2004, Social networks and trade liberalization, NBER Working Paper 10769. – networks of labor forceBekkali, M., Beghin, J.C., 2005. The economics of domestic cultural content protection in broadcasting. Working Paper 05033. Iowa State University.Bala, V., Van Long, N. 2005. International trade and cultural diversity with preference selection. European Journal of Political Economy 21, 143-162.Cowen, T., 2002. Creative destruction: How Globalization is changing the world cultures, Princeton University Press, Princeton

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3. Model

Production

Labor only factor of production, three goods, quantities denoted as z, x1 and x2.

z = Lz/a,

x1 = L1/k1,

x2 = L2/k2,

k1 = k2 = k, 2k < 1 = L.

w = 1, pz = wa and pj = wk (perfect competition).

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Utility function

Modified Hotelling Model:

z = Quantity of standard consumption good

Good 1 and good 2 at end points of unit interval, consumers uniformly distributed.

= utility of identity creating, traditional good

= marginal disutility of distance from ideal good

= marginal network effect.

1 11

1 ,,;

2

121 xifxq

xifxqzxxzxu

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A country or society is conformist if > ; individualistic if < ; super-individualistic if 2 < ; traditional if > ; non-traditional if < .

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Social Optimum in Autarky

First derivative of W w.r.t. q:

dW/dq = + 4q 2 2q + W is convex in q if 2 > ,

corner solution q* = 1.

11max 1

00

22

qq

ydyydyqqqzqW

11122/max qqqzqW

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Social Optimum of super-individualistic Country

q* < 1 for < 2, q* = 1 for > 2.

22

2*

q

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4. Autarky

Hotelling’s indifference condition: + q q = (1 q) (1 q),

consequently

0 < qa < 1 requires <

22

1aq

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Equilibrium

0 < qa < 1 if <

qa = 1 if + > 0

Consumer with strongest preference for good 2 won‘t switch unilaterally.qa = 0 if > .

Consumer with strongest preference for good 1 won‘t switch unilaterally.

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Equilibria

Traditional: >

Non traditional: <

Conformist: > qa = 1, q* = 1 qta = 1, 0 < qda < 1, qna = 0,

q* =1

Individualistic: < < 2 qa = 1, q* = 1 0 < qa < 1, q* = 1

Super-individualistic: > 2 qa = 1, q* = 1 0 < qe < q* < 1

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5. Free trade without comparative advantage

Assumption: Foreign country consumes only good 2 as its “traditional” good in autarky and continues to do so in the free trade regime. Prices are the same in both countries. = measures “cultural openness”, with 0 1, (no xenophobia).Utility function in open economy:

1 11

1 ,,;

2

121 xifxq

xifxqzxxzxu

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Social Optimum

Welfare function

First derivative w.r.t. q:

dW/dq = + q[4 2] [2 + ] + .

W is convex in q for 2 > corner solution:

q* = 1 for . (inward looking society)

q* = 0 for < . (outward looking society)

11max 1

00

22

qq

ydyydyqqqqzqW

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Interior solution:

0 < q** < 1 requires < 2.

222

1**

q

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Free trade equilibria of conformist economy ( > )

qf = 1 + or (1 ).

qf = 0 (1 + ) .

Both conditions are mutually compatible!

Diversified equilibrium:

Indifference condition: + ( )q = ( )(1 q) + ,

22

1q

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qf = 1 iff (1 + ) . (“super-traditional”).

This condition requires in conformist economy > .

0 < qf < 1 requires – –

22

1q

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Free trade equilibria if >

Inward looking: > Outward looking: <

Super traditional: (1+) qe = 1, q** = 1

Traditional:(1+) > > (1)

qt = 1,

qo = 0, 0 < qd < 1/2

q** = 1.

qt = 1, qo = 0,

1/2 < qd < 1

q** = 0.

Anti traditional: (1) qe =0, q** = 0

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Free trade equilibria if 2 > >

Inward looking: > Outward looking: <

Super traditional: > (1 )

qe = 1, q** = 1

Diversified: < .

1/2 < qd < 1, q** = 1 q0 = 0, 0 < qd < 1/2,

q** = 0

Anti traditional: < (1 + )

q0 = 0, q** = 0

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Free trade equilibria if 2 <

Inward looking: > Outward looking: <

Super traditional: > (1 ) qe = 1, q** = 1

2 < < . 1/2 < qd < 1, q** = 1 0 < qd < 1/2 , q** = 0

2 > qd < q** < 1 q** < qd < 1/2

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6. Free trade with comparative advantage

Assumption: Price of good 2 lower in foreign country:ph > pf, ph – pf := .Modified indifference condition:+q – q – ph = ( – )(1 – q) + – pf.Define

and substitute for in above analysis.

:ˆ

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7. Discussion

Scenarios: Big, very traditional, inward looking (foreign) country enters free trade with smaller, less traditional, less inward looking domestic country:

Welfare loss due to partial crowding out of traditional domestic good,

Welfare gain due to complete crowding out of traditional domestic good;

Efficiency loss because of insufficient crowding out of traditional domestic good