Culture, Tastes, and Market Integration: Testing the Localized Tastes Hypothesis

To test the localized tastes hypothesis, we use historical dialect similarity as an instrument to predict the persistent component of regional taste differences. Analyzing wholesale markets for fruits and vegetables in Japan, we find that predicted taste differences have a strong, statistically significant effect, explaining approximately 9% of the mean volatility in law-of-one-price deviations. Our findings are robust across extensive validity checks, which scrutinize and relax our exclusion restriction, distinguishing between various sources of endogeneity, and confirm our baseline results based on alternative instruments, which exploit exogenous differences in agro-climatic endowments.