Wealth of Nations vs. Identity of Nations: Gains from Trade and the Erosion of Social Cohesion

Nicolas Dietl and Sebastian Krautheim

No 12503, CESifo Working Paper Series from CESifo

Abstract: We interpret the increased polarization in Western societies over global economic issues as an interaction of economic forces and shifts in a society’s social identity equilibrium. We combine social identity theory with standard small open economy model of international trade to study the effect of economic globalization with a bias towards "unethical" production. Starting from a social cohesion equilibrium where all consumers identify with society at large, we find that a falling price of the unethical variety leads to an erosion of social cohesion and can ultimately lead to a polarized social identity equilibrium where caring consumers are estranged from the society they live in. We show that this form of economic globalization is not only not always a Pareto improvement, but may even lead to aggregate welfare losses.

Keywords: globalization backlash; social identity; polarization; Ricardo; social cohesion (search for similar items in EconPapers)
JEL-codes: F13 F68 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12503

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