Standard models of reference-dependent well-being treat reference groups as exogenous, while evidence suggests individuals actively select into their social networks. This selection shapes both exposure to social comparisons and their mental health consequences. This raises fundamental questions: do peers’ economic outcomes affect mental health once network formation is endogenous? If so, through which mechanisms does social comparison operate? We combine individual-level survey data with detailed communication-based network measures to study the effects of peers’ income on mental health allowing for endogenous network formation. We find that exposure to higher-income peers is associated with worse mental health, particularly increased depressive symptoms, and that these effects are largely driven by endogenous network formation rather than peers’ income levels per se. Using a structural formation model, we show that relative status concerns shape network structure by inducing individuals to form ties with peers who are modestly wealthier or substantially poorer. Failing to account for these selection biases estimates of peer effects on mental health.