On the Origin of Polarization

We provide a model of group sorting or polarization based on group identity alone. In our model, agents differ from one another in terms of a binary group identity. Groups may also differ in terms of the distribution of abilities, but the distribution of abilities by group is uncertain and both groups are ex-ante equally likely to be distributed in the same way. Each agent’s ability is private information, but group identity is publicly observable. Young agents make a decision as to which of two locations they will reside in when old and play a stage game with others when they are old, based on their private histories from a previous stage game played in the location where they were born (and young). We show that, in equilibrium, agents endogenously sort themselves according to their group identity to two different locations under rational belief updating, and that, in the limit, it is generally the case that the society becomes completely polarized, with members of each group rationally choosing to congregate in distinct locations