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Do institutions shape ethnic identity and interethnic relations? If so, how? Existing literature suggests that certain institutions increase ethnic and parochial attachment while weakening national unity. We hypothesize that institutional contexts in which access to political power is inextricably tied to ethnic identity increase political salience of ethnic identity, worsen outgroup attitudes, and enhances ethnic favoritism. We test this hypothesis by examining effects of (ethnic) federalism in Myanmar where ethnic-based federalism is widely viewed as a main way to manage diversity and protect minorities. We do so by fielding an online survey experiment in post-coup Myanmar—a context in which renewed attention is paid to how different forms of governance and electoral structures could ensure the inclusion and participation of marginalized groups in society. Results from this study not only speaks to the literature on ethnic politics and political institutions but also to policy-making.