ABSTRACT
Introduction In this paper, I attempt to use simple tools of economic theory to understand ethnicity, ethnic conflict, and nationalism and their role in destabilizing democracy under the Weimar regime. The paper builds on previous work on ethnicity (Wintrobe 1995), and on political inaction in democratic systems (Howitt and Wintrobe 1993, 1995). The starting point of the analysis is a set of circumstances in which there are gains from trade, as in standard neoclassical theory, but that property rights are not costlessly enforceable. Once the latter fiction is discarded, the situation is that people still wish to exchange, but they always have to worry about being cheated. There are reputation mechanisms for solving this problem (Klein and Leffler 1981, Shapiro 1983), but they tend to be expensive. Similar problems arise in politics, interpreted as political exchange in the absence of legal enforcement (one cannot sue a politician in court for breaking a campaign promise), and within families (parents cannot sue their children for not supporting them in their old age).
