Can growth heal the political divide?

We introduce a notion of political polarization that takes into account not just the distance between agents’ preferred policies, but also the intensity of this preference. We refer to this notion as “political divide” and we quantify it as the monetary cost, as a share of the total economy, that an agent is willing to incur to attain its ideal policy rather than the policy preferred by another agent. Groups with a large political divide are more likely to fall into affective polarization and political conflict. Holding ideological preferences constant, we show that the link between growth and the political divide between two ideologically separate groups depends on the curvature of the utility over wealth, as measured by the coefficient of relative risk-aversion: if agents’ relative risk aversion is below one, economic growth reduces the political divide; whereas, if agents are very risk-averse, growth increase the divide, exhacerbating political conflict.