Visibility Bias in the Transmission of Consumption Beliefs and Undersaving

Abstract

We model visibility bias in the social transmission of consumption behavior. When consumption is more salient than non-consumption, people perceive that others are consuming heavily, and infer that future prospects are favorable. This increases aggregate consumption in a positive feedback loop. A distinctive implication is that disclosure policy interventions can ameliorate undersaving. In contrast with wealth-signaling models, information asymmetry about wealth reduces overconsumption. The model predicts that saving is influenced by social connectedness, observation biases, and demographic structure; and provides new insight into savings rates. These predictions are distinct from other common models of consumption distortions.

Keywords: visibility bias, overconsumption, saving, behavioral economics, social influence, social learning

JEL Classification: G11, G41, E71, E21