Divide and Rule: An Origin of Polarization and Conflict* Simon Alder Yikai Wang December 31, 2018 (link to latest version) Abstract We propose a theory of civil conflict where political elites strategically ini- tiate conflicts in order to polarize society and sustain their own power. We provide a micro-foundation for this divide-and-rule strategy by modeling po- larization as a lack of trust among groups in the population. Trust is shaped by economic interactions between members of different groups who observe past interactions and update their belief about the relationship with the other group. High trust in turn increases the expected gains from trade and there- fore the common interest of people to trade without being taxed by the elite. This leads to a revolutionary threat to which the elite responds by starting a conflict to interrupt trade and prevent trust from increasing further. JEL-Classification: D74, D83, F15, H30, N40 Keywords: Polarization, divide and rule, conflict, ethnic violence, autocracy, trade, trust *We would like to thank Simeon D. Alder, Josef Falkinger, Dominic Rohner, Viktor Tsyren- nikov, Fabrizio Zilibotti, Josef Zweim¨uller,and participants at the Annual Meeting of the Society for Economic Dynamics, the University of Oslo, and the University of Zurich for valuable com- ments. Caroline Chouard and Sebastian Ottinger provided excellent research assistance. Financial support from the European Research Council (ERC Advanced Grant IPCDP-229883) is gratefully acknowledged. Department of Economics, University of North Carolina at Chapel Hill,
[email protected]. Department of Economics, University of Oslo,
[email protected]. 1 1 Introduction Conflict causes enormous costs, and yet we often observe wide support in the popu- lation for political elites that initiate conflicts.