Center for Effective Global Action

We examine the effect of inter-group economic competition on within-group violent conflict in the context of Indonesia’s signature Community Driven Development (CDD) program. Using a triple difference design, we exploit exogenous variation in the degree to which villages in sub-districts compete for public funds. We find that higher competition between villages reduces conflict but only up to moderate levels of competition. The conflict-reducing effects of competition are largest in the most ethnically fractionalized and segregated villages and exist regardless of the eventual outcome of the competition. Our results are consistent with external competition favouring coordination within otherwise divided communities and boosting village identity relative to ethnic identity. We find no evidence that competition increases inter-group violence. Our results suggest that economic incentives to compete with out-groups can be beneficial policy mechanisms to favour cooperation and reduce violence within communities.