International Trade with Social Comparisons

Abstract

As consumers in countries around the world become increasingly aware of and sensitive to the products that their foreign counterparts consume, a natural question is what predictions do classic trade frameworks hold when incorporating social comparison-based preferences? We analyze this question in a general equilibrium framework for a two-country, two-good world, in which the gap between domestic and foreign consumption of a product can enter into the representative consumer's utility function. We consider nine exhaustive social comparison scenarios, which differ based upon the combination and origin of products that consumers of each country hold a social comparison over. We show that Home Comparison preference (social comparison over the home-produced good) unilaterally brings consumption and welfare bene fits to the home country, and global welfare is enhanced when both countries maintain such preferences. On the other hand, Foreign Envy (social comparison over the foreign-produced good) is disadvantageous to the home country, contributing negatively to welfare when the other country either prefers its own produced good or has no particular social preference. Mutual Foreign Envy however, tends to contribute positively to global welfare. Our analysis helps to explain the social welfare incentives of policy-makers in promoting cross-country comparisons of domestic goods among their own consumers, while advocating domestically-produced goods as status symbols abroad.