The formation of social groups under status concern

Abstract

I study the interaction of two forces in the formation of social groups: the preference for high quality peers and the desire for status among one's peers. I examine their equilibrium effects under different market structures and find that status concern reduces the potential for and benefit of sorting - both for a social planner and a monopolist - but the interaction between preference for quality and status can make the exclusion of some agents a second-best outcome. Even in settings with complementarities, price discrimination and screening can be necessary to facilitate sorting and increase welfare. Nevertheless, positional concerns can be beneficial for welfare if they provide sufficient incentive to engage more with one's group and thus increase positive spillovers. In those cases, welfare is higher if individuals have at least some degree of status concern, even if the welfare measure ignores such relative comparisons.