Julian Hinz (Kiel Institute, RA "The Global Division of Labour")
Economic transactions necessitate that buyer and seller communicate. While common spoken languages have been widely recognized as a determinant of trade, the mechanisms at play are largely lacking micro-foundations. In this paper we explicitly incorporate languages in a model of trade between locations with heterogeneous consumers and heterogeneous firms. The model yields a structural gravity equation that can be used to compute general equilibrium counterfactuals with different underlying local language distributions. We quantify the model by deriving the local distribution of languages from a sample of 2 billion geolocalized tweets and conduct several counterfactual experiments. For one such experiment, a common European language, we find welfare gains of on average 9 % across locations in Europe, with significant heterogeneity in magnitude between locations. For another experiment, the elimination of within-country language diversity in Europe, the model predicts significant welfare losses of on average -3 % across locations in Europe. The results underline a significant “economic value” associated with common.
Julian Hinz (Kiel Institut) — Elsa Leromain (London School of Economics & Paris School of Economics)