Why do people care about social status?

This paper shows that complementary interaction can induce people to care about social status because it serves as a signal of non-observable abilities. There is a unique separating 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. The analysis shows that people’s instrumental concern for social status has important welfare and policy implications. Indeed, peoples’ efforts to “keep up with the Joneses” may be welfare enhancing.