This paper contributes to the literature incorporating social identity into international economics. We develop a theoretical framework for studying the interplay between international integration and identity politics, taking into account that both policies and identities are endogenous. We find that, in general, a union is more fragile when peripheral member countries have higher status than the politically dominant “Core” countries, as this leads in equilibrium to stronger national identification in the periphery and a lower willingness to compromise. Low-status countries are less likely to secede, even when between-country differences in optimal policies are large, and although equilibrium union policies impose significant economic hardship. Contrary to the anticipation of many union advocates, mutual solidarity is unlikely to emerge as a result of integration alone.
Bibliographical noteFunding Information:
We thank the editor, Andres Rodrìguez-Clare, anonymous referees, Alberto Alesina, Matthew Gentzkow, Alex Gershkov, Benny Geys, Sergiu Hart, Georg Kirchsteiger, Ilan Kremer, Kostas Makatos, Joram Mayshar, Enrico Spolaore, Guido Tabellini, John Taylor, Jean Tirole, Thierry Verdier, Katia Zhuravskaya, and many seminar and conference participants for very valuable comments and suggestions; and Franz Buscha and Jonathan Renshon for sharing their data. Dor Morag provided excellent research assistance. Financial support from the European Union , European Research Council Starting Grant project no. 336659 is gratefully acknowledged. A previous draft of the paper circulated under the title “Grexit vs. Brexit: International Integration under Endogenous Social Identities.”.
- Currency unions
- International integration
- Social identity