A game theory approach for corporate environmental risk mitigation

Abstract

Manufacturing companies face many environmental risk problems in their production process. Demands of safe production processes and strict environmental regulations drive companies to balance capital planning problems with minimization of risk constraints. Environmental pollution liability insurance (EPLI) could be a useful tool to mitigate these risks. Manufacturing companies generally prefer to spend less money on investments for risk minimization; on the other hand, insurance providers prefer to provide more alternatives to satisfy the needs of manufacturing companies and obtain as much benefit as possible. The interaction between a manufacturing company and a company providing EPLI may be modeled as a game between two players. This paper proposes a game theory approach for corporate environmental risk mitigation via EPLI. Parameters of the game theoretic model can be calibrated to achieve a desirable equilibrium. A pharmaceutical company case study is used to demonstrate the application of the proposed approach.