Cultural Differences and Institutional Integration∗

If citizens of different countries belonging to an economic union adhere to different and deeply rooted cultural norms, when these countries interact their leaders may find it impossible to agree on effi cient policies, especially in hard times. Political leaders’ actions are bound to express policies that do not violate these norms. This paper provides a simple positive theory and a compelling case study of the importance of cultural clashes when economies integrate, as well as a normative argument about the desirability of institutional integration. We argue that a political union, with a common enforcement agency, is the more beneficial the greater is cultural diversity in an economic