Cultural Identity, Mobility, and Decentralization

Regional cultural identity benefits native citizens as it increases trust and facilitates economic interaction between them ("social capital"). At the same time, it affects migration decisions: it excludes non-native mobile workers from economic interaction within the region and binds native citizens to the region. A regional government deciding on regional cultural policy will not account for the effect of cultural identity on the expected value of non-native's migration options. For a basic theoretical model where future local productivity is exogenous and random, we show that this externality will be negative, so that decentralized spending on regional cultural identity will be suboptimally high.We then extend our model in various ways: When allowing regions to undertake (costly) efforts to decrease cultural differences, we find that such efforts will be suboptimally low. When assuming that one region has a slight ex ante productivity advantage, we find that, for this asymmetric setting, the richer region will invest relatively more in cultural identity, while for total welfare, it would actually be better to equalize spending across both regions.We further extend our model by assuming that wages and rents are endogenously determined by migration, and we find that in this setting, as long as the regional government only cares about native's total income, culture investments will still always have a detrimental effect on the other region's welfare, again leading to the result of oversupply under decentralization.In a further extension, we adress the positive question of how owners of one production factor (land, mobile labor) will behave when they control cultural policy: we show how in this case, cultural policy may act as a sort of "rent-extraction instrument", as it enables the respective group to increase its factor income at the expense of total welfare.As for practical policy, we conclude that in principle, our results provide theoretical justification for coordination of cultural policies. Corresponding policy measures include a larger share of common cultural goods in public culture provision, as well as language and cultural exchange programs