Grievances that derive from the unequal treatment of ethnic groups are a key motivation for civil war. Ethnic power sharing should therefore reduce the risk of internal conflict. Yet conflict researchers disagree on whether formal power‐sharing institutions effectively prevent large‐scale violence. We can improve our understanding of the effect of power‐sharing institutions by analyzing the mechanisms under which they operate. To this effect, we compare the direct effect of formal power‐sharing institutions on peace with their indirect effect through power‐sharing behavior. Combining data on inclusive and territorially dispersive institutions with information on power‐sharing behavior, we empirically assess this relationship on a global scale. Our causal mediation analysis reveals that formal power‐sharing institutions affect the probability of ethnic conflict onset mostly through power‐sharing behavior that these institutions induce.