Institutions are often considered the most important force in shaping ethnic identities. This is so because they are seen as defining not just the options available to political actors or the actors' preferences, but also the actors' self-definitions. Institutions are defined as “the formal or informal procedures, routines, norms and conventions embedded in the organizational structure of the polity” (Hall and Taylor 1996, 938). Institutions affect politics in two crucial ways. First, institutions create enforcement mechanisms for agreements, assess penalties for violating the agreements, and control the flow of information, thus constraining the strategies pursued by actors in the political arena. By limiting the realm of the possible in politics, institutions force political actors to choose from a limited menu of options. Second, the institutional context shapes not only the strategies, but also the preferences and goals of political actors. Institutions influence preferences by providing cognitive and moral templates that actors can use to interpret and analyze a situation and possible courses of action. They have great power over political activity because they not only shape the ability of individuals to pursue their interests, but also structure the nature of the interests themselves (Hall and Taylor 1996, Thelen and Steinmo 1992).

The effects of institutions are not limited to shaping preferences. Through their control of information and their ability to set the rules of political competition, institutions also influence how political actors perceive themselves.