Implications of the Tradeoff between Inside and Outside Social Status in Group Choice

TL;DR

This paper models how individuals choose groups based on social status tradeoffs, revealing four distinct population types and spillover effects, with implications for various social and economic group choices.

Contribution

It introduces a two-stage signaling model capturing inside and outside status tradeoffs, identifying four population types and analyzing policy spillover effects.

Findings

Four population types based on group choice and action incentives

Spillover effects between groups when policies are implemented

Implications for school, firm, and residential preferences

Abstract

We investigate a group choice problem of agents pursuing social status. We assume heterogeneous agents want to signal their private information (ability, income, patience, altruism, etc.) to others, facing tradeoff between "outside status" (desire to be perceived in prestigious group from outside observers) and "inside status" (desire to be perceived talented from peers inside their group). To analyze the tradeoff, we develop two stage signaling model in which each agent firstly chooses her group and secondly chooses her action in the group she chose. They face binary choice problems both in group and action choices. Using cutoff strategy, we construct an partially separating equilibrium such that there are four populations: (i) choosing high group with strong incentive for action in the group, (ii) high group with weak incentive, (iii) low group with strong incentive, and (iv) low group with weak incentive. By comparative statics results, we find some spillover effects from a certain group to another, on how four populations change, when a policy is taken in each group. These results have rich implications for group choice problems like school, firm or residential preference.