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Legal system involvement in adolescence is associated with declines in close friendships in high school, an important source of social capital in the transition to adulthood. Interpersonal exclusion theory (Jacobsen 2020), an extension of labeling theory, explains these findings by articulating the micro-level processes by which legal system involvement weakens normative peer relationships (i.e., rejection, withdrawal, separation, homophily). These processes are thought to alter both the structure and composition of the peer networks of arrested youth. We extend interpersonal exclusion theory to examine the consequences of adolescent arrest after high school, in early young adulthood. We expect adolescent arrest to be associated with smaller friendship networks (structure) and greater involvement with delinquent peers (composition) in early young adulthood. We propose that these outcomes are driven by institutional exclusion, which is a reduction in participation in important social institutions after legal system involvement. Less access to education or employment due to a prior arrest leaves young adults with fewer opportunities to escape the context in which the stigma of their arrest history is perceptible, resulting in fewer friends and more deviant networks. We test these propositions using PROSPER, a study of peer networks followed from early adolescence to emerging adulthood.