Ethnocentric preferences and the environment with international trade

We define a model of international trade with two countries, two vertically differentiated goods, and heterogenous consumers concerning their willingness to pay for quality. Trade generates two sources of pollution: the production of domestic and traded goods, and their transportation between countries. Consumers in both countries manifest home bias which translates into ethnocentric preferences: (i) consumer perceive the quality of the domestic good amplified; and (ii) consumers thrive additional satisfaction when consuming a domestic good rather than a foreign one since only the former can satisfy their sense of place. By contrast, they suffer a psychological penalty when consuming a foreign product. We investigate the role of trade costs and ethnocentric attitude in shaping the equilibrium configuration of the international duopoly. Finally, we uncover the environmental damage from production and from transport in presence of ethnocentrism.