Preferences and the home bias in trade

Abstract

Why is there less observed trade than is predicted by neoclassical trade models? A home bias in consumption due to preferences can partially explain this. Using data from a randomly assigned auction mechanism and survey conducted in Madagascar, respondents' willingness to pay for rice of varying quality and origin is investigated. By imposing a novel structure on traditional valuation collection methods, one finds that consumers will pay approximately 8% more for home-grown rice. The key result is that consumers place greater value on an item produced in their own country without any tangible reason to do so other than the product's origin. This preference-based explanation is one piece of the mosaic of factors that cause disproportionate consumption of domestically produced goods. This paper provides concrete evidence in favor of structuring trade models to allow for an explicit home bias in preferences.