Most societies in the world contain strong group identities and the culture supporting these groups is highly persistent. This persistence in turn gives rise to a practical problem: how do and should societies with strong group identities organize themselves for exchange and public good provision? In this paper, we develop a theoretical framework – with social structure characterized by number and size of groups as well as quality of ties between them – that allows us to study, normatively and positively, the relationship between social structure, state capacity, and economic activity.