Salience bias: A framework about the importance of prices and budget constraints perceptions

Abstract

We postulate a general salience framework where, under bounded rationality, agents can be biased in their perception about the impact of consumption on their (intertemporal and otherwise) budget constraints. Under weak assumptions, we prove this distorts several aspects of their consumption and production plans, and, in order to estimate the willingness to pay to get rid of these biases, we measure how this distortion generates inefficiencies. We provide three applications. First, we trace and illustrate the consequences of applying this salience framework to assess the impact of underestimating labor’s effects on nonlinear (or linear) budget constraints. Second, following a traditional hyperbolic intertemporal model, we add salience biases to disentangle and measure the effects of present vs. salience biases, which are generally confounded. This allows us to address the heterogeneous effects of some nudges. Third, we investigate the implications of firm managers incurring salience biases in production plans. With these results, we derive monetary estimations about inefficiency costs and talk about their policy implications. Finally, we discuss experimental designs that test the existence of salience biases and distinguish them from other present biases such as hyperbolic discounting.