Inequality and Group Participation: Theory and Evidence from Rural Tanzania

This paper investigates the determinants of group membership, and in particular the effect of income inequality on individual incentives to join economic groups. Drawing on a simple model, we show that an increase in inequality has an ambiguous e¤ect and that the type of access rule (open versus restricted access) is key in determining what income categories are represented in the group. Furthermore, the shape of the income distribution can be crucial to determine whether increased inequality leads to more or less group participation. Using survey data from rural Tanzania we find that inequality at the village level has a negative impact on the likelihood that the respondents are members of any group. This e¤ect is particularly significant for relatively wealthier people, both when relative wealth is ‘objectively’ measured, and when it is ‘subjectively’ defined. However, when we disaggregate groups by type of access rule, we find that inequality can have a positive impact on participation, depending on the shape of the income distribution. Finally, we assess the impact of inequality on various dimensions of group functioning.