The economic consequences of political alienation: Ethnic minority status and investment behavior in a post-conflict society

Abstract

How does minority status influence individual investment and savings decisions in a post-conflict society? We argue that minority status is associated with lower trust in third-party institutions controlled by an ethnic out-group, and, as a result, leads to a preference for certain earnings over potentially risky investments. We test this hypothesis with multiple sources of evidence from Bosnia and Herzegovina. First, we experimentally elicit investment behavior among members of the same ethnic group on two sides of the boundary that makes some individuals majorities and others minorities. Second, we induce minority status in the lab. Analyses across the studies show that both natural and induced minority statuses lead to lower levels of investment. We provide ecological validity to the experimental results with the analysis of a large, representative household survey and an original survey of businessmen. The results have large implications for understanding of inter-ethnic relations and the sense of security in development.