Ethnic Division and Fiscal Transfer: A Game-Theoretic Analysis.

Many governments use economic means to deal with ethnic conflicts. For instance, it has been widely observed that regions with a high concentration of ethnic minority tend to receive more fiscal transfer. The existing literature, however, finds no clear evidence that economic appeasement would reduce ethnic conflicts. We argue that expanding the pie for ethnic minority alone is not sufficient for reducing ethnic conflicts. How the pie is being distributed within the minority group is critical. In fact, if the within-group income inequality worsens as a result of the economic appeasement policy, such a policy would intensify the between-group conflicts. In this paper, we provide a formal model to explain the logic of our argument. In addition, we use the recent social unrest in Tibet to illustrate the interplay between within-group distribution and between-group conflicts. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]