How does cultural diversity affect social organization? Do institutional differences between diverse and homogeneous communities have implications for economic development? This paper argues that heterogeneity not only impedes informal mechanisms of cooperation, but also increases demand for formal institutions. Greater reliance on formal law and public authority, in turn, facilitates economic development by enabling arm’s length transactions and encouraging entrepreneurship. I test this argument using an original dataset on the size and composition of migrant groups settled in 1,217 municipalities transferred from Germany to Poland in 1945. I find that homogeneous migrant groups were more successful in reestablishing private order institutions that relied on informal enforcement mechanisms, such as volunteer fire brigades, while diverse migrant communities relied on formal third-party enforcement for the provision of public goods. Economically similar during state socialism, communities settled by diverse migrants in the 1940s registered higher incomes and greater entrepreneurship following the transition to a market economy. Their residents also express greater confidence in formal institutions, such as courts and the police.
Author: Volha Charnysh
Status: Preliminary Draft (Do not cite without author’s permission)