Ethnic Diversity, Public Spending and Political Regimes

We study the relationship between ethnic diversity and public spending under two different political regimes, namely, democracy and dictatorship. We build a theory where political leaders (democratically elected or not) decide on the allocation of spending on different types of public goods: a general public good and an ethnically-targetable public good. We show that the relationship between public spending and ethnic diversity is qualitatively different under the two regimes. In particular, higher ethnic diversity leads to greater investment in general rather than group-specific public goods under democracy; the opposite relation obtains under dictatorship. We also discuss some implications of our results for economic performance and citizen's welfare.