Corporate environmentalism in a managerial delegation and abatement subsidy policy

Abstract

ABSTRACT This study examines strategic corporate environmentalism in a managerial delegation contract within a product differentiated duopolistic framework in which polluting firms can purchase abatement goods from an eco-industry. We emphasize a cost pass-through effect under price competition, which can restrict the outputs of polluting firms but increase their profits. We then construct an abatement subsidy policy and show that the government can induce the firm’s profitable environmental concern to be socially desirable by substituting the output-restriction behavior with the adoption of abatement goods. Our analysis supports the Porter hypothesis that given a well-designed government regulation on the voluntary initiative of self-regulation, Pareto-improving alignment between private and social incentives is feasible and attainable.