Scandinavian Working Papers in Economics

Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics

No 04-10: Economic Cooperation and Social Identity: Towards a Model of Economic Cross-Cultural Integration

Karsten Bjerring Olsen
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Karsten Bjerring Olsen: Department of Economics, Aarhus School of Business, Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark

Abstract: In arguing that borders not only should be understood as economic barriers to trade, but also as cultural barriers to interaction, this paper attempts to operationalize a broader interpretation of borders with regards to economic cross-cultural integration. Thus, by formalizing the cultural effects of borders as mental distances (interpreted as social identities), and by using an agentbased simulation model, I analyze how the border affects, and is itself affected by, economic integration. The model is based on two regions separated by a border. Based on expected payoffs and mental distance, agents first choose whether to interact at home or to cross the border. Then, agents choose their action in a simple PD game based on a general disposition of trust, as well as the mental distance should the interaction partner be from across the border. The agent’s mental distance and trust level are then updated according to the agent’s experience of the interaction (positive or negative). The model generally reveals that underlying cultural processes may affect the success of economic integration considerably, and suggests that the success of the integration depends significantly (and in asymmetric ways) on mental distances between regions, on economically vs. culturally motivated behavior, and on collectivistic vs. individualistic characters of the regional cultures.

Keywords: Agent-Based Modeling; Cooperation; Culture; Social Identity; Economic Integration

JEL-codes: B52; C63; F02; R19; Z10

39 pages, May 27, 2004

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