Why Do People Care About Social Status?

This paper shows that complementary interaction induces people to care about social status because it serves as a signal of non-observable abilities. There is a unique equilibrium in which everyone cares about social status. In this equilibrium a person’s social status perfectly reveals his abilities, and everyone matches with a person of like ability. By interpreting social status as a signal of ability, this paper makes it possible to analyze economic impacts of consumers’ concern for social status with standard assumptions about consumers’ preferences. The analysis shows that people’s instrumental concern for social status has important welfare and policy implications. Indeed, peoples’ e¤orts to “keep up with the Joneses” may be welfare enhancing.