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The lack of a shared national identity is often blamed for ethnic conflict and low economic development. This raises the question: does a society’s modernization (in particular, industrialization) lead to a shared identity, thereby bringing good outcomes in conflict and development? This paper theoretically examines the question using a contest model of conflict augmented with multiple production sectors and social identification. The analysis shows that as modernization proceeds, a society shifts to an equilibrium with a universal national identity, a low level of conflict, and high output if national pride is high, ethnic differences are not salient in people’s minds, resources are not abundant, or institutions are of good quality. Otherwise, the society shifts to an equilibrium with a universal ethnic identity and worse economic and political outcomes. The analysis suggests that nation-building policies play a critical role in overcoming the negative effects of modernization under the latter situation. |
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