This chapter reviews what is known about the development of racial categorization in childhood, and considers when and for whom racial categorization leads to racial stereotyping and prejudice. According to the developmental intergroup theory (DIT), children categorize others along psychologically salient dimensions, and this process of categorization can initiate the formation of stereotypes and prejudice. This theory outlined four main factors that can influence the development of stereotypes and prejudice towards psychologically salient social groups: in-group bias, explicit attributions in the environment, implicit group/attribute covariation, and essentialism. The chapter also reviews two factors that have received increasing empirical support in recent years: social essentialism and social norms. Social essentialism provides insight into how and when racial categories take on a deeper meaning that might affect the acquisition of racial stereotypes and prejudice, whereas social norms constrain when and whether those category-based racial judgments and evaluations are acquired and applied.