Productivity, social interaction and communication

We have developed a model of endogenous language development which allows to study the links between social interaction and technology, and derive its consequences for productivity and welfare. Our main results are: 1. The equilibrium degree of literacy is suboptimally low because of the "thin market externality" associated with the language. 2. Social stratification generates linguistic stratification and the associated output and welfare losses due to communication failure. 3. Because of the thin market externality, there is too much stratification 4. Specialized technologies are less vulnerable to stratification than flexible ones, or, equivalently, increased flexibility may have adverse effects on output when society is stratified.