Is polarization bad? Cecilia Testa a,b,c,n a Economics Department, Royal Holloway University of London, Egham Surrey TW20 0EX, United Kingdom b Tinbergen Institute, The Netherlands c Centro Studi Luca d’Agliano, Italy article info Article history: Received 14 June 2011 Accepted 26 April 2012 Available online 11 May 2012 JEL classification: D72 D74 Keywords: Diversity Polarization Elections Corruption abstract The adverse effects of political and social polarization on government policies are empirically well documented, yet some democracies seem to cope well or even benefit from diversity. In this paper we develop a theoretical model to show how elections in polarized societies contribute to improve quality of government. We consider both polarization among citizens and political actors (political polarization), where the second is endogenously determined by parties competing to win the support of the majority of voters. We find that more heterogeneous societies are more likely to be politically polarized, but that the divergence of positions in the political arena helps the electorate control government corruption by raising electoral stakes. Our results, which are consistent with the findings of a substantial empirical literature, suggest that, when funneled into political competition, polarization may help improving quality of government and policies. & 2012 Elsevier B.V. All rights reserved. 1. Introduction The costs of preferences’ heterogeneity are well understood: more heterogeneous societies (in terms of ethnicity, religion, ideology, language or income) tend to be ruled by bad governments that choose poor policies. 1 Yet, polarization may also bring about some important benefits, which may be due to the specific institutional settings allowing some countries to handle diversity in a productive way (Alesina and La Ferrara, 2005). While the set of rules and institutions that may play this important role is vast (Esteban and Schneider, 2008), our understanding of their working at a micro-level is limited (Alesina and Zhuravskaya, 2011). In this paper we focus on the role of elections in polarized societies to analyze their effect on quality of government. We consider ideological polarization both among the electorate and political actors (political polarization), where the second is endogenously determined by parties competing to win the support of the majority of voters. Our main contribution is to show that political polarization, by raising electoral stakes, helps the electorate control government corruption. In our set-up candidates are selected by political parties, whose behavior is modeled following a large political science literature, according to which ideological goals are an important driver of the behavior of party activists (Aldrich, 1995; Fiorina et al., 2005) and candidates (Ansolabehere et al., 2001; Poole and Rosenthal, 1996; Lee et al., 2004). Parties want to win elections in order to implement their ideological agenda. Candidates also care about ideology, both when they are in Contents lists available at SciVerse ScienceDirect journal homepage: www.elsevier.com/locate/eer European Economic Review 0014-2921/$ - see front matter & 2012 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.euroecorev.2012.04.005 n Correspondence address: Economics Department, Royal Holloway University of London, Egham Surrey TW20 0EX, United Kingdom. Tel.: þ44 1784 44 3983. E-mail address: cecilia.testa@rhul.ac.uk 1 The literature on the effects of preference heterogeneity on government policies is vast. For an overview, see Alesina and La Ferrara (2005) and Campos and Kuzeyev (2007). Polarization is also linked to more conflict (see Esteban and Ray, 2011; Montalvo and Reynal-Querol, 2005). European Economic Review 56 (2012) 1104–1118