Ethnic Divisions and Production in Firms

A body of literature suggests that ethnic heterogeneity limits economic growth. This paper provides microeconometric evidence on the direct effect of ethnic divisions on productivity. In team production at a plant in Kenya, an upstream worker supplies and distributes flowers to two downstream workers who assemble them into bunches. The plant uses an essentially random rotation process to assign workers to positions, leading to three types of teams: (a) ethnically homogeneous teams, and teams in which (b) one or (c) both downstream workers belong to a tribe in rivalry with the upstream worker’s tribe. I find strong evidence that upstream workers undersupply non-coethnic downstream workers (vertical discrimination) and shift flowers from non-coethnic to coethnic downstream workers (horizontal discrimination), at the cost of lower own pay and total output. A period of ethnic conflict following Kenya’s 2007 election led to a sharp increase in discrimination. In response, the plant began paying the two downstream workers for their combined output (team pay). This led to a modest output reduction in (a) and (c) teams – as predicted by standard incentive models – but an increase in output in (b) teams, and overall. Workers’ behavior before conflict, during conflict, and under team pay is predicted by a model of taste-based discrimination. My findings suggest that inter-ethnic rivalries lower allocative efficiency in the private sector, that the economic costs of ethnic diversity vary with the political environment, and that in high-cost environments firms are forced to adopt “second best” policies to limit discrimination distortions. JEL codes: D03, D22, D24, D61, D64, D74, F63, J24, J33, J71, 012, 014 ∗Winner of the 2013 CESifo Prize for best paper in Applied Microeconomics. I am grateful to Lawrence Katz (editor), Andrei Shleifer (co-editor), and three anonymous referees for insightful comments that significantly improved the paper. I also thank Ted Miguel, David Card, Stefano DellaVigna and Fred Finan for invaluable guidance and support, and Miguel Almunia, Vladimir Asriyan, Ivan Balbuzanov, Oriana Bandiera, Oystein Daljord, Andreas Fagereng, Willa Friedman, Francois Gerard, Bryan Graham, Pat Kline, Ed Lazear, Rocco Macchiavello, Jamie McCasland, Justin McCrary, Enrico Moretti, Kaivan Munshi, Takeshi Murooka, Omar Nayeem, Paul Niehaus, Matthew Rabin, Gautam Rao, Imran Rasul, James Robinson, Ana Rocca, Antonio Rosato, Yona Rubinstein, Michel Serafinelli, Lowell Taylor, Rebecca Thornton, Victoria Vanasco, Chris Woodruff and seminar participants at UC Berkeley, Chicago Booth, Columbia GSB / Economics, Cornell, UC Davis ARE, Harvard / MIT, Kellogg, LSE / UCL, University of Michigan, Oslo University, Penn State, Stanford GSB, Stockholm IIES, UPF, Warwick, Wharton, the IGC Growth Week, the NBER workshop on Development and Organizational Economics, and the Working Group on African Political Economy for comments and suggestions. Jason Luk and Morgan Gibson provided excellent research assistance. I thank CEGA, IBER and the Russel Sage Foundation for financial support. All errors are my own. †Columbia University, Uris Hall, 3022 Broadway, Room 622, New York, NY 10027. [email protected]