Diversity, Institutions, and Economic Outcomes: Post-WWII Displacement in Poland

Abstract

How does an increase in cultural diversity affect state–society interactions? Do institutional differences between heterogeneous and homogeneous communities influence economic activity? I argue that heterogeneity not only impedes informal cooperation but also increases demand for third-party enforcement provided by the state. Over time, the greater willingness of heterogeneous communities to engage with state institutions facilitates the accumulation of state capacity and, in common-interest states, promotes private economic activity. I test this argument using original data on post-WWII population transfers in Poland. I find that homogeneous migrant communities were initially more successful in providing local public goods through informal enforcement, while heterogeneous migrant communities relied on the state for the provision of public goods. Economically similar during state socialism, heterogeneous communities collected higher tax revenues and registered higher incomes and entrepreneurship rates following the transition to the market. These findings challenge the predominant view of diversity as harmful to economic development.