Buy local?: government incentives to 'inform' consumers

Abstract

This paper considers governmental incentives to provide information to local consumers about the relative merits of local versus foreign goods. We construct a model in which a local firm in a small, open economy competes in its domestic market with imports. Consumers are willing to pay an idiosyncratic premium for the local product, drawn from some support that the importing country government can affect through a costly information campaign. We examine incentives to undertake such a campaign in autarky and in the case of trade. We show, inter alia, that while a national welfare-maximising government will always wish to shift this distribution upwards, it may not wish to reduce the variance of valuations, and that the optimal response of a foreign government will be to increase any support it offers to its exporters. Furthermore, falling world prices generally reduce the attractiveness of such a campaign both to a welfare-maximising government and to one that cares only for domestic profits.