Within-Group Heterogeneity in a Multi-Ethnic Society

Is ethnic diversity good or bad for economic development? Most empirical studies find corrosive effects. In this paper, I show that ethnic diversity need not spell poor development outcomes–a history of within-group heterogeneity can turn ethnic diversity into an advantage for long-run development. I collect new data from a natural experiment regarding Peru's colonial history: the forced resettlement of native populations in the 16th century. This intervention forced together various ethnic groups into new jurisdictions. In those jurisdictions where colonial officials concentrated individuals with a history of within-group heterogeneity, who, prior to colonization, worked in complementary climates of the Andes, ethnic diversity results in systematically lower costs and may even become advantageous. Neither precolonial groups' political complexity nor their degree of economic development explain this result. The transmission of prosocial behavior is one likely channel. I also find evidence consistent with a positive role of economic complementarities between ethnic groups.