We survey and assess the literature on the positive and negative effects of ethnic diversity on economic policies and outcomes. Our focus is on both focus both cities in developed countries (the US) and villages in developing countries. We also consider the endogenous formation of political jurisdictions and we highlight several open issues in need of further research.

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Ethnic Diversity and Economic Performance

This paper studies what determines group formation and the degree of participation when the population is heterogeneous, both in terms of income and race or ethnicity. We are especially interested in whether and how much the degree of heterogeneity in communities influences the amount of participation in different types of groups. Using survey data on group membership and data on U. S. localities, we find that, after controlling for many individual characteristics, participation in social activities is significantly lower in more unequal and in more racially or ethnically fragmented localities. We also find that those individuals who express views against racial mixing are less prone to participate in groups the more racially heterogeneous their community is. These results are consistent with our model of group formation.

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Participation in Heterogeneous Communities

We survey and assess the literature on the positive and negative effects of ethnic diversity on economic policies and outcomes. Our focus is on communities of different size and organizational structure, such as countries, cities in developed countries, and villages and groups in developing countries. We also consider the endogenous formation of political jurisdictions and highlight several open issues in need of further research, in particular the endogenous formation of ethnic identity and the measurement of ethnic diversity.

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This paper develops a model of the breakup or unification of nations. In each nation the decision to separate is taken by majority voting. A basic trade-off between the efficiency gains of unification and the costs in terms of loss of control on political decisions is highlighted. The model emphasizes political conflicts over redistribution policies. The main results of the paper are i) when income distributions vary across regions and the efficiency gains from unification are small, separation occurs in equilibrium; and ii) when all factors of production are perfectly mobile, all incentives for separation disappear. I. INTRODUCTION Following the demise of communism, the entire map of Europe, from the Atlantic coast to the Urals, is being redrawn and issues of separation, unification, and the redrawing of borders are yet again at the forefront of European concerns. Many of the issues raised by this process are primarily of a political, cultural, or linguistic nature. However, there are also economic considerations that bear on this problem. The objective of this paper is to analyze some important economic and political determinants of the process of unification and separation of democratic nations. The starting point of our analysis is to suppose that from an economic efficiency point of view, separation of nations is never desirable. A unified nation is always more efficient since free trade among regions is guaranteed, duplication costs in defense and law enforcement are avoided, and local public goods provision (such as transportation and communication networks, or common standards) can be coordinated. Furthermore, any benefits of decentralization that might be obtained in a world with several nations may also be achieved within a unified nation by replicating the administrative structure of the world with several

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The Breakup of Nations: A Political Economy Analysis

This paper first considers the implications of biological evolution for economic preferences. It analyzes why utility functions evolved, considers evidence that utility is both hedonic and adaptive, and suggests why such adaptation might have evolved. Time preference and attitudes to risk are treated--in particular, whether the former is exponential and the latter are selfish. Arguments for another form of interdependence--a concern with status--are treated. The paper then considers the evolution of rationality. One hypothesis examined is that human intelligence and longevity were forged by hunter-gatherer economies; another is that intelligence was spurred by competitive social interactions.

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The Biological Basis of Economic Behavior

In a model of an economy with multiple public goods and differentiated crowding, it is shown that asymptotically the core has the equal treatment property and coincides with the equilibrium outcomes. It follows that all individuals of the same type in the same jurisdiction must pay the same Lindahl taxes and, with strict convexity of preferences, the same Lindahl prices. With only one private good, for sufficiently large economies we show (a) the equivalence of the core and the set of equilibrium outcomes and (b) the nonemptiness of approximate cores and their equivalence to the set of approximate equilibrium outcomes.

Myrna Wooders

Papers

Equivalence of Lindahl equilibrium with participation prices and the core

The core of a continuum economy with widespread externalities and finite coalitions: From finite to continuum economies

Stability of jurisdiction structures in economies with local public goods

Taste-homogeneity of optimal jurisdictions in a Tiebout economy with crowding types and endogenous educational investment choices

The partnered core of an economy and the partnered competitive equilibrium