Neckties in the Tropics: A Model of International Trade and Cultural Diversity

Some cultural goods, like clothes and films, are consumed socially and are thus characterized by the same consumption network externalities as languages. At the same time, producers of new cultural goods in any one country draw on the stock of ideas generated by previous cultural production in all countries. For such goods, costless trade and communication tend to lead to the dominance of one cultural style, increasing utility in the short run but reducing quality and generating cultural stagnation in the long run. Increasing trade costs while keeping communication costs low may reduce welfare by stimulating production of cultural goods that are "compatible" with the dominant style, thereby capturing consumption network externalities, but that add little to the stock of usable ideas. A reform of cultural policy suggested by our two-country analysis could be to remove import restrictions in the smaller country and replace them with subsidies to the fixed costs of production of new cultural goods in its traditional style.