This paper by Alberto Alesina and Eliana La Ferrara explores the impact of ethnic diversity on economic policies and outcomes, focusing on countries, cities in developed nations (the US), and villages in developing nations. The authors discuss both the positive and negative effects of ethnic diversity, highlighting the trade-offs between variety and complexity. They examine the endogenous formation of political jurisdictions and identify several open research questions. The paper reviews empirical literature on the effects of ethnic fragmentation on productivity, income levels, and public policies, drawing from cross-country comparisons and local community studies. Key findings include: 1. **Theoretical Underpinnings**: Ethnic diversity can affect economic choices through individual preferences, strategies, and production functions. The benefits of variety in production are more relevant in advanced societies, while costs arise from difficulties in sharing public goods. 2. **Empirical Evidence**: - **Cross-Country Analysis**: Studies show that more ethnically fragmented countries tend to grow less, with negative effects being more pronounced at lower levels of income. - **American Localities**: In the US, racial fragmentation is associated with lower population growth and less efficient provision of public goods, particularly in initially poor counties. - **Developing Countries**: In developing economies, ethnic diversity can influence access to credit and firm performance, with potential negative impacts on productivity. 3. **Policy Implications**: The paper suggests that richer democracies may better handle ethnic diversity, and that institutions play a crucial role in mitigating the negative effects of ethnic fragmentation. The authors conclude by emphasizing the need for further research to understand the complex dynamics of ethnic diversity and its economic consequences.This paper by Alberto Alesina and Eliana La Ferrara explores the impact of ethnic diversity on economic policies and outcomes, focusing on countries, cities in developed nations (the US), and villages in developing nations. The authors discuss both the positive and negative effects of ethnic diversity, highlighting the trade-offs between variety and complexity. They examine the endogenous formation of political jurisdictions and identify several open research questions. The paper reviews empirical literature on the effects of ethnic fragmentation on productivity, income levels, and public policies, drawing from cross-country comparisons and local community studies. Key findings include: 1. **Theoretical Underpinnings**: Ethnic diversity can affect economic choices through individual preferences, strategies, and production functions. The benefits of variety in production are more relevant in advanced societies, while costs arise from difficulties in sharing public goods. 2. **Empirical Evidence**: - **Cross-Country Analysis**: Studies show that more ethnically fragmented countries tend to grow less, with negative effects being more pronounced at lower levels of income. - **American Localities**: In the US, racial fragmentation is associated with lower population growth and less efficient provision of public goods, particularly in initially poor counties. - **Developing Countries**: In developing economies, ethnic diversity can influence access to credit and firm performance, with potential negative impacts on productivity. 3. **Policy Implications**: The paper suggests that richer democracies may better handle ethnic diversity, and that institutions play a crucial role in mitigating the negative effects of ethnic fragmentation. The authors conclude by emphasizing the need for further research to understand the complex dynamics of ethnic diversity and its economic consequences.