Although the setting is not specifically identified (except as a city with a population of 135,000), it seems likely that the story takes place in Tarkington's favorite location, Indiana, and may very well represent his hometown of Indianapolis.

In presenting Penrod's environment, Tarkington describes many of the things that make up middle-class life in an early twentieth-century midwestern town, including Penrod's school, his playmates, a carnival, and a school play.

Penrod is a period piece that describes the American Midwest during a time of innocence and prosperity for the nation.

Though Penrod is intended as a piece of realistic writing, today the setting seems hopelessly idyllic, providing no glimpses toward the modern world.