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Finance Department's Lecture

TIME:10:30  Jun11,2018
PLACE:Room 1008,Business Building
TOPIC:Visibility Bias in the Transmission of Consumption Norms and Undersaving


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 favorable information about prospects for future consumption. The biased transmission of beliefs increases consumption and the equilibrium interest rate. Information asymmetry about the wealth of others dilutes the inference from high observed consumption that the future prospects are good. 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 suggests that relatively simple policy interventions can ameliorate undersaving.