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Abstract
This paper explores the idea of how wealth is distributed across social groups
(ethnic or language groups, gender, etc.) and how such distribution fundamentally
affects the evolution of economic inequality. By providing microfoundations suitable
for this exploration, the paper hopes to enhance the understanding of when social
forces contribute to the reproduction of economic inequality. In tackling this issue,
the paper offers contributions in two domains. First, it models social capital as a real
capital asset with direct use and collateral value. Second, it extends the concepts of
identity, alienation and polarization used by Esteban and Ray (1994). This
generalization permits consideration of the multiple characteristics that shape social
identity, inclusion and exclusion. It also underwrites a higher-order measure of
socioeconomic polarization that permits exploration of the hypothesis that economic
inequality is most pernicious and persistent when it is socially embedded. Among
other things the paper shows that holding constant the initial levels of economic
polarization and wealth inequality, higher socioeconomic polarization increases
subsequent income and wealth inequality. Far from being a distributionally neutral
panacea for missing markets, social capital in this model may itself generate
exclusion and deepen social and economic cleavages.