Economic Benefits of Ethnolinguistic Diversity: Implications for ...

The other study that provided support for the positive relationship between diversity and productivity is that of Gianmarco I. P. Ottaviano and Giovanni Peri (2004). The study examined the effects of ethnic diversity on economic productivity in American cities and found that ethnic diversity has productivity-enhancing effects and positive “amenity effects,” both on production and consumption. The results showed that the individuals living in more culturally diverse cities earn higher wages and pay higher rents than those living in more homogeneous cities.

Enriched by the new insights about the productivity gains associated with diversity, Alesina and La Ferrara (2004) presented a simple model that analyzed the economic effects of diversity. The model highlighted the trade-off between the benefits of variety and the costs of heterogeneity of preferences in a multiethnic society. The authors argued that, on one hand, the potential benefits of heterogeneity come from the variety of individual skills used in the production process, which increases the overall productivity. The costs, on the other hand, come from the inability to agree on common public goods and public policies.

Alesina and La Ferrara (2004) referred to the work of Edward P. Lazear (1999a, 1999b), who also discussed the trade-off between the productive benefits of diversity and the costs of diversity arising from the problems of communication between people. He argued that there is an optimal point of this trade-off, which indicates the optimal degree of heterogeneity. According to Lazear, the optimal point of the trade-off between the benefits and costs of diversity for the production depends on the nature of the production unit and its technology.

In the model proposed by Alesina and La Ferrara (2004), the trade-off between the benefits and costs of diversity depends on the level of per capita output. The authors argued that the benefits from more ethnic fragmentation increase with the level of per capita output. Therefore, the benefits in production from a variety of skills are more likely to be relevant in more advanced and complex societies.