Racial Fragmentation, Income Inequality and Social Capital Formation: New Evidence from the US

Existing studies of social capital formation in US metropolitan areas have found that social capital is lower when there is more income inequality and greater racial fragmentation. I add to this literature by examining the role of income inequality between racial groups (racial income inequality). I find that greater racial income inequality reduces social capital. Also, racial fragmentation is no longer a significant determinant of social capital once racial income inequality is accounted for. This result is consistent with a simple conceptual framework where concurrent differences in race and income are especially detrimental for social capital formation. I find empirical support for further implications deriving from this assumption. In particular, I show that racial income inequality has a more detrimental effect in more racially fragmented communities and that trust falls more in minority groups than in the majority group when racial income inequality increases. ∗PhD Candidate, Universitat Pompeu Fabra, Department of Economics; e-mail: [email protected]. I am grateful to Antonio Ciccone for his advice and continuous support, and to Francesco Caselli, Nicola Gennaioli, Albrecht Glitz, Stephan Litschig, Giacomo Ponzetto, Marta Reynal-Querol, Joachim Voth, as well as seminar participants in the CREI International Lunch and UPF Labour/Development Lunch for useful comments and suggestions.