Banking on Conflict: Managers and Organizational Design

Abstract

This paper investigates how the internal structure of organizations reflects multiculturalism and how shocks that amplify ethnic conflict affect their organizational design. We develop a theoretical model illustrating how conflict increases communication and information acquisition costs, thereby influencing organizational design. To test the model's predictions, we construct a novel panel dataset on the internal organization and management practices of Ethiopian bank branches, combined with detailed data on branch managers' ethnicity, banks' dominant ethnicity, city demographics and conflict. Using variation in exposure to violent ethnic conflict, we causally estimate how bank-level exposure to such conflict affects branch-level organizational design. We find that greater exposure to conflict at the bank level induces branches to hire managers who share the city’s dominant ethnicity rather than the headquarters', and to implement a number of complementary changes to address the incentive problem this creates. These organizational changes allow banks to sustain lending performance, adjusting loan size and screening intensity without increasing default rates. Our results uncover a general mechanism by which diverse organizations navigate polarization, trading off local knowledge against higher internal communication costs.