Globalization of Markets and Ethnocentrism: New Insights for the Environment

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