Ethnic Diversity, Market Structure and Risk Sharing in Agrarian Societies

We consider a population of heterogenous laborers and landlords who belong to different ethnic groups so that working together implies a cost (because of language and cultural differences). Part of the production is random (because for example of climate change) and not observable (ex ante) by both landlords and laborers. We study the optimal risk sharing contract set by landlords who imperfectly compete to attract laborers. We show that, in equilibrium, landlords tend to hire laborers of similar ethnic background and landlords' co-ethnics earn more than other laborers. We also show that wages strongly depend on the degree of isolation of laborers from other communities. Large language and cultural differences imply that only laborers and landlords of similar ethnic origin can work together. This gives a high monopsony power to landlords which are able to set low wages. Finally, we find that the variable part of the remuneration offered to the laborers increases with the degree of ethnic diversity in the region whereas the fixed part is reduced when ethnic costs increase.