Ethnic divisions, according to empirical democratic theory, and commonsense understandings of politics, threaten the survival of democratic institutions. One of the principal mechanisms linking the politicization of ethnic divisions with the destabilization of democracy is the so-called outbidding effect. According to theories of ethnic outbidding, the politicization of ethnic divisions inevitably gives rise to one or more ethnic parties. The emergence of even a single ethnic party, in turn, “infects” the political system, leading to a spiral of extreme bids that destroys competitive politics altogether. In contrast, I make the (counterintuitive) claim that ethnic parties can sustain a democratic system if they are institutionally encouraged: outbidding can be reversed by replacing the unidimensional ethnic identities assumed by the outbidding models with multidimensional ones. My argument is based on the anomalous case of ethnic party behavior in India. It implies that the threat to democratic stability, where it exists, comes not from the intrinsic nature of ethnic divisions, but from the institutional context within which ethnic politics takes place. Institutions that artificially restrict ethnic politics to a single dimension destabilize democracy, whereas institutions that foster multiple dimensions of ethnic identity can sustain it.Kanchan Chandra is associate professor of political science at MIT (kchandra@mit.edu) and author of Why Ethnic Parties Succeed (2004). For useful discussions and written comments, the author thanks the anonymous reviewers and the editorial board of Perspectives on Politics, Steve Ansolabehere, Paul Brass, Eric Dickson, Cynthia Enloe, James Fearon, Rachel Gisselquist, J. P. Gownder, Henry Hale, Jennifer Hochschild, Mala Htun, Samuel Huntington, Stathis Kalyvas, Nelson Kasfir, Herbert Kitschelt, David Laitin, Gerard Padro-i-Miquel, Lloyd Rudolph, Susanne Rudolph, Jody Shapiro, Kenneth Shepsle, James Snyder, Ashutosh Varshney, Santhanagopalan Vasudev, Barry Weingast, Myron Weiner, Chris Wendt, Steven Wilkinson, Adam Ziegfeld, and participants of the fall 2003 meeting of the Laboratory in Comparative Ethnic Processes (LICEP) at UCLA.