The role of social effects in shaping beliefs about the economy

Abstract

Abstract We use survey data to demonstrate that individuals extrapolate from their social environment when forming estimates about aggregate economic outcomes (e.g. the aggregate homeownership rate). In a first approach, we follow the previous literature and construct hypothetical peer groups using information on the location, age, and education of respondents. We confirm that the average homeownership rates in these ‘constructed peer groups’ affect respondents’ subjective estimates of national homeownership rates. In a second approach, we extend the previous literature and utilize direct information provided by survey participants about the characteristics of their peer groups. We show that these ‘self-assessed peer groups’ are even better predictors for how survey respondents assess the aggregate measure. We show that the same mechanisms are at work for estimates of the national unemployment rate. We also demonstrate that individuals who are less knowledgeable about economic matters rely more on peer group information.