Can Novel Financial Assets Mitigate Ethnic Conflict?

A fundamental challenge facing entrepreneurs in many developing societies is to reduce the central role of political risk — including violence and coercive expropriation — in shaping opportunities and investment decisions. Simply put, individuals are much less likely to want to start businesses when the profits from such businesses— or their very lives — are under threat from other groups. Particularly in ethnically divided societies, the threat or reality of violence remains a major deterrent to business. In this project, we test whether the introduction of novel financial assets — particularly “ethnic swaps” that allow individuals to credibly share exposure to ethnically — delimited political risk across groups — can in fact mitigate incentives for ethnic conflict and instead encourage productive investment. Given large historical animosities, ethnic conflicts in a number of societies have been considered extremely difficult to resolve, in part because of the deep-seated emotions involved. Our approach will be to design a series of lab and field experiments to separate both behavioral and rational responses to the swapping of political risk across ethnic groups and to examine what role, if any, financial assets can play in reducing violence in two of the most difficult of these environments. The two field locations we choose are those with great economic potential, where businesses nevertheless face the grave threat of political violence: Ahmedabad in India, a major business center but also the scene of large-scale Hindu-Muslim rioting in the early 21st century, and Jerusalem, Israel, the geographical epicenter of the continuing Israeli-Palestinian conflict. These are also areas where the challenges of historical inter-ethnic animosity and the threat of ongoing political violence are writ large, which calls not only for a novel research design but for innovative technological implementation in bringing the behavioral lab into the field. Yet, these are also locations where the problem of ethnic animosity has often been seen as unsolvable and where the potential for affecting change may be great.