Visibility Bias in the Transmission of Consumption Norms and Undersaving

Abstract

We study the spread of social norms for time preferences, and the effect of the transmission process on equilibrium consumption and interest rates. In the model, consumption is more salient than non-consumption. Owing to visibility bias and the availability heuristic, people infer that low saving is normative and increase their own discount rates accordingly. This effect is self-reinforcing at the societal level, resulting in overconsumption and high interest rates. In contrast with Veblen effects effects, which imply greater overconsumption when there is greater information asymmetry about the wealth of others (as occurs when wealth dispersion is high), in our setting greater information asymmetry dilutes the inference from high observed consumption that the discount rate of others is high. In consequence, equilibrium consumption is lower, the opposite prediction.