This paper examines how socioeconomic stratification and alternative systems of education finance affect inequality and growth. Agents interact through local public goods or externalities (school funding, neighborhood effects) and economywide linkages (complementary skills, knowledge spillovers). Sorting families into homogeneous communities often minimizes the costs of existing heterogeneity but mixing reduces heterogeneity faster. Integration, therefore, tends to slow down growth in the short run yet raise it in the long run. A move to state funding of education presents society with a similar intertemporal trade-off. Local and global complementarities play major roles in determining the efficient social and educational structures. Copyright 1996 by American Economic Association.
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