Diversity Taxes

58 Pages Posted: 18 Jun 2019 Last revised: 17 Dec 2021

See all articles by Saumya Deojain

Saumya Deojain

W. Allen Wallis Institute of Political Economy; Thapar School of Liberal Arts and Sciences

David Lindequist

Miami University - Department of Economics

Date Written: July 1, 2019


The sociological literature indicates that within diverse communities, agents create externalities on each other when they consume market goods to express their identity. We provide a model in which local governments use taxation and agents adjust social networks to address these identity expression externalities. We find that taxation and network adjustments can be strategic complements or substitutes depending on agents' taste for out-group identity expression: the marginal value of taxation as a tool to regulate identity expression can be increasing or decreasing in agents' exposure to out-group identity expression. We show how diversity affects social networks and taxation, and how the existence of a tax response to identity expression externalities impacts network adjustments. Based on our theoretical framework we estimate a simultaneous equations model using US city data on ethnic diversity, taxation, and segregation. Our results provide suggestive evidence that taxation and network choice are strategic complements in addressing moderately positive ethnic identity expression externalities. Interpreting the empirical results through the lens of our model implies that agents' desire to segregate decreases when local governments use taxation to regulate identity expression.

Keywords: diversity, externalities, taxation, social networks, identity economics

JEL Classification: D62, H23, H41, Z13, Z18

Suggested Citation

Deojain, Saumya and Lindequist, David, Diversity Taxes (July 1, 2019). Available at SSRN: https://ssrn.com/abstract=3401377 or http://dx.doi.org/10.2139/ssrn.3401377

Saumya Deojain (Contact Author)

W. Allen Wallis Institute of Political Economy ( email )

Rochester, NY 14627
United States
314-281-2054 (Phone)

Thapar School of Liberal Arts and Sciences ( email )

Thapar School of Liberal Arts and Sciences
Thapar Institute of Engineering and Technology
Patiala, Punjab 147004

David Lindequist

Miami University - Department of Economics ( email )

83 N Patterson Ave
Oxford, OH 45056
United States

HOME PAGE: http:///www.david-lindequist.com/

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