A Theory of Strategic Uncertainty and Cultural Diversity

This paper presents a novel mechanism through which culture can affect behavior. Cultural diversity matters because it influences the degree of strategic uncertainty that players face. We model this by building on research in psychology on perspective taking. The model delivers comparative statics that are broadly consistent with experimental evidence and that are difficult to obtain with existing methods. In addition, it can account for a variety of disparate evidence, including why inefficient social customs persist in some societies but not in others and why exclusively targeting incentives may not help with resolving collective action problems. ∗A version of this paper has been circulated under the title “Challenging Conformity: A Case for Diversity.” Part of the material incorporated here was previously in a paper entitled “A belief-based theory of homophily” by the same authors (Kets and Sandroni, 2015). We are grateful to the Associate Editor and three anonymous referees for excellent suggestions. We thank Larbi Alaoui, Vincent Crawford, Yan Chen, Vessela Daskalova, Wouter Dessein, Matthew Jackson, Wouter Kager, Rachel Kranton, Bart Lipman, George Mailath, Niko Matouschek, Rosemarie Nagel, Santiago Oliveros, Scott Page, Antonio Penta, Nicola Persico, Debraj Ray, Nick Robalino, Yuval Salant, Larry Samuelson, Paul Seabright, Rajiv Sethi, Eran Shmaya, Andy Skrzypacz, Jakub Steiner, Colin Stewart, Jeroen Swinkels, Tymon Tatur, Yiqing Xing, and numerous seminar audiences and conference participants for helpful comments and stimulating discussions. †Department of Economics, University of Oxford. E-mail: willemien.kets@economics.ox.ac.uk. ‡Kellogg School of Management, Northwestern University. E-mail: sandroni@kellogg.northwestern.edu