Does living in close proximity to members of other ethnic groups make people more or less tolerant of ethnic differences? How does local electoral competition interact with ethnic demography to affect ethnic tolerance? This paper examines these questions by combining survey data with new measures of local ethnic composition and political competition in Kenya. People living in ethnically diverse areas report higher levels of interethnic trust and residentially segregated people are less trusting of members of other ethnic groups. In contrast to research linking national electoral competition and ethnic salience, there is no evidence that local electoral competition increases intolerance. This paper has important implications for the study of the political and economic consequences of ethnic diversity and suggests that even in developing countries, where resource conflict along ethnic lines is acute and sometimes violent, sharing neighborhoods with members of different ethnic groups may lead to tolerance.