Abstract: How do migration and the resulting cultural diversity affect social organization? Do institutional differences between diverse and homogeneous migrant communities influence economic development? This paper argues that heterogeneity and disruption of social ties not only impede informal cooperation, but also increase demand for formal institutions. Greater reliance on formal institutions, in turn, facilitates arm’s length transactions and entrepreneurship. I test this argument using an original dataset on the size and composition of population uprooted by the post-WWII border changes in Poland. I find that localities settled by more homogeneous migrants were more successful in reestablishing private-order institutions that relied on informal enforcement, such as volunteer fire brigades, while localities populated by heterogeneous migrant population relied on formal third-party enforcement for the provision of public goods. Economically similar during state socialism, more heterogeneous migrant communities registered higher incomes and entrepreneurship following the transition to a market economy.