“Visibility Bias in the Transmission of Consumption Norms and Undersaving” by Bing Han
University of Toronto
We study how bias in the social transmission process affects contagion of time preference norms. In the model, consumption is more salient than non-consumption. This visibility bias causes people to perceive that others are consuming heavily and to infer that others have a high discount rate. The transmission of norms for high discounting increases consumption and the equilibrium interest rate. Information asymmetry about the wealth of others dilutes the inference from high observed consumption that the discount rate is high. In consequence, in contrast with the Veblen wealth-signaling approach, information asymmetry about wealth reduces overconsumption. The visibility bias approach offers a novel explanation for the dramatic drop in the savings rate in the US and several other countries in the last thirty years. In contrast with other approaches, the visibility bias approach implies that relatively simple policy interventions can ameliorate undersaving.