Social Capital and the Reproduction of Inequality in Socially Polarized Economies

This paper explores the idea that how wealth is distributed across social groups (ethnic or language groups, gender, etc.) fundamentally affects the evolution of economic inequality. By providing microfoundations suitable for this exploration, this paper hopes to enhance our understanding of when social forces contribute to the reproduction of economic inequality. In tackling this issue, this 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 us to consider the multiple characteristics that shape social identity, inclusion and exclusion. It also underwrites a higher-order measure of socio-economic polarization that permits us to explore the hypothesis that economic inequality is most pernicious and persistent when it is socially embedded. Among other things we are able to show that holding constant the initial levels of economic polarization and wealth inequality, higher socio-economic 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.