In this paper, we study how, depending on the sociological and technological characteristics of the economy, a “unified” or, on the contrary, a stratified way of communicating may emerge. Communication takes place less efficiently in the stratified case, because people who spend different languages cannot communicate with each other.

The main results of the paper are as follows. First, the equilibrium degree of literacy is suboptimally low because of the “thin market externality” associated with the language. Second, social stratification generates linguistic stratification and the associated output and welfare losses due to communication failure. Third, because of the thin market externality, there is too much stratification. Fourth, specialized technologies are less vulnerable to stratification than flexible ones, or, equivalently, increased flexibility may have adverse effects on output when society is stratified.