Social Segmentation and Market Construction: Explaining Causes and Exploring Cures

Abstract

This study examines how actors from diverse and competing social groups can come to identify as members of a common market rather than as agents of their discrete social groups. Using data on new-investor recruitment into Kenya’s nascent capital market, the Nairobi Securities Exchange, from 2005 through 2008, I identified mechanisms driving social segmentation as well as integration of disparate groups. The empirical context is characterized by weak formal institutions and high levels of inter-ethnic distrust, a novel but productive setting for studying how potential adopters use social identities to resolve uncertainty around expected gains of participating in a new market. Results show that instead of exhibiting blanket influence by homophilous peers, potential investors were positively influenced by profits earned by proximate coethnic peers primarily when their own exposure to corrupt financial organizations was higher but were negatively influenced by the profits of ethnic outsiders when the market was identified with distrusted political rivals. Several mechanisms moderated this pattern of distrust, including inter-ethnic residential and religious integration but especially the use of national language rather than ethnic language advertising campaigns, which reframed the market as a shared social identity. Findings indicate that the negative effects of social segmentation, including the distorting influences of dissimilar peers and environmental factors such as political tensions and distrust in institutions, can be reversed when potential investors learn about new market opportunities from neutral third parties or when policy makers frame such practices in socially neutral language.