Cultural diversity, institutions, and urban economic performance

Interactions between culturally diverse individuals can spur economic benefits by stimulating new ideas that raise urban residents’ productivity. But diversity can also diminish economic well-being by making communication difficult, and by stimulating conflict. This paper investigates whether urban institutions—in particular residents’ sense of generalized trust—determine when diversity is an economic asset and when it is a liability. To do so, data on trust, birthplace diversity, wages, and demographics in US metropolitan areas are combined. The evidence suggests that workers are much better able to harness the productivity-enhancing spillovers that arise from cultural diversity when they live in cities endowed with strong informal institutions.