The Costs of Cultural Persistence: Reducing Mismatch and Welfare Loss

Abstract

While scholars have documented several cases of long-run cultural persistence in recent years, not much attention has been paid to understanding the economic implications of culture persistence, and even less so to connecting the implications of cultural persistence to policy solutions. I extend the model of cultural persistence in Giuliano and Nunn (2021) that investigates the equilibrium importance of tradition in a society. I find that in the equilibrium that arises from the dynamics of the model, the proportion of traditionalists is significantly higher than the optimal proportion and causes a large societal welfare loss. Further, I derive an expression for mismatch, the probability that a randomly chosen individual doesn’t select the payoff-maximizing action, and show this probability to be strictly increasing in the proportion of traditionalists at equilibrium. Within the model framework, I show that lowering the cost of acquiring information, which can be thought of as education, reduces both mismatch and welfare loss. To correct for welfare loss, I derive an expression for a Pigouvian tax that subsidizes the cost of information acquisition to restore the societal optimum. Finally, I empirically test the model prediction that a lower cost of information acquisition, corresponding to higher educational attainment, should be negatively related to the importance of tradition. Running analyses both at the individual and country levels, I verify that the relationship between educational attainment and equilibrium importance of tradition is significant and negative. By using the average years of schooling in immigrants’ countries of origin as an instrument for the educational attainment of their children, I show that the impact of education on tradition is plausibly causal.