NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Visibility Bias in the Transmission of Consumption Beliefs and Undersaving

Bing Han, David Hirshleifer, Johan Walden

NBER Working Paper No. 25566
Issued in February 2019
NBER Program(s):Asset Pricing

We study how bias in the social transmission process affects contagion of consumption beliefs and behavior. In the model, consumption is more salient than non-consumption. This visibility bias causes people to perceive that others are consuming heavily and have favorable information about future wealth prospects. These inferences increase aggregate consumption. In contrast with other approaches, the visibility bias approach suggests that relatively simple disclosure policy interventions can ameliorate undersaving. In contrast with the Veblen wealth-signaling approach, information asymmetry about wealth reduces overconsumption. Our approach offers new implications about the effects on saving of social connectedness, observation biases, and demographic structure; and offers a novel explanation for the dramatic drop in the savings rate in the US and several other countries in the last thirty years.

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Document Object Identifier (DOI): 10.3386/w25566

 
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