National Culture and Social Protection as Alternative Insurance Devices

The process of creative destruction which characterizes market economies makes specific investments in human capital particularly risky. Therefore, these economies are characterized by a painful trade-off between the advantages of market flexibility and those of specialization. In this paper, we propose a joint analysis of two important policies the State can pursue to improve the terms of this trade-off: the development of a homogeneous national culture on the one side, and the provision of insurance in the form of social protection on the other. We explore formally the relation between the two instruments, and discuss some comparative statics on the optimal mix between them. We argue that, because of the process of European integration, which has reinforced the role of cultural standardization relatively to that of social protection, the risk is high that E.U. countries end up doing too much for cultural standardization and too little for social protection. © 2002 Elsevier Science B.V. All rights reserved.