In the current study, a curvilinear association was examined between differential parenting and children's social understanding as measured using standardized assessments and behavioral observations. Social understanding was comprised of theory‐of‐mind and behavior indicating understanding of others’ minds (i.e., cognitive sensitivity and internal state talk and reasoning during sibling interactions). Data came from a community sample of 372 children (51.6% males; M age = 5.57, SD = 0.77), their younger siblings (M age = 3.14, SD = 0.27), and their mothers who were observed in their homes. We hypothesized that in families with higher levels of differential parenting, both favored and disfavored older siblings would display poorer social understanding, but that disfavored children would be more negatively impacted. Results from a hierarchical regression analysis indicated an inverse linear effect, rather than a curvilinear relationship, between being favored by mother and siblings’ social understanding. Specifically, disfavored older children showed higher levels of social understanding when interacting with their favored younger sibling. This relationship remained significant after controlling for variables such as age, SES, and language. Findings suggest that differential parenting plays a role in children's ability to understand others.