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 flnd 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.
Politicians may use disguised' redistributive policies in order to circumvent opposition to explicit tax-transfer schemes. First, we present a theoretical model that formalizes this hypothesis; then we provide evidence that in US cities, politicians use public employment as such a redistributive device. We find that city employment is significantly higher in cities where income inequality and ethnic fragmentation are higher.
Trade liberalization and political separatism go hand in hand. In a world of trade restrictions, large countries enjoy economic benefits because political boundaries determine the size of the market. In a world of free trade and global markets even relatively small cultural, linguistic or ethnic groups can benefit from forming small and homogeneous political jurisdictions that trade peacefully and are economically integrated with others. This paper provides a formal model of the relationship between openness and the equilibrium number and size of countries, and successfully tests two implications of the model. The first one is that the economic benefits of country size depend on and are mediated by the degree of openness to trade. The second is that the history of Nation-State creations and secessions is influenced by the trade regime.