40 Pages Posted: 18 Jun 2019 Last revised: 1 Dec 2020
Date Written: July 1, 2019
We study how social conflict generated through cultural diversity affects public policy. In our model, social conflict arises when culturally differentiated groups impose negative cultural consumption externalities on each other. These externalities can be mitigated by a government which uses taxation to reduce disposable income, thereby transforming cultural consumption into public good consumption. We link the size of equilibrium taxation to characteristics of the underlying distribution of cultural groups as well as to the local government's social welfare function. We test the predictions from our theoretical framework using U.S. city and county data from 1990. Controlling for a variety of socioeconomic and demographic indicators, we verify a key prediction: local taxes per capita are increasing in diversity as measured by ethnic fractionalization. We further document that other characteristics of the group size distribution have effects on local taxes per capita that are in line with our theoretical analysis.
Keywords: cultural diversity, externalities, taxation, public good provision
JEL Classification: D62, H21, Z18
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