Abstract
Environmental regulators often use environmental policy to induce green investment by firms. However, if an environmental policy fails to exert a long-run effect on regulating the economic agents’ behavior, it may be more reasonable to think of the firm as the leader in the game, since the investment in green technology is usually a strategic decision. In this paper, we consider a three-stage Stackelberg game to address the interaction between a profit-maximizing firm (Stackelberg leader) facing emission-dependent demand, and the environmental regulator (Stackelberg follower). The firm decides on the green technology level in the first stage of the game based on its understanding of the regulator’s profits function, especially an environmental concern that is introduced as an exogenous variable. In the current research, we show that high levels of the regulator’s environmental concerns do not necessarily lead to the choice of green technology by the firm, and green investment level depends on the combined effects of the market and operational factors for a given level of the regulator’s environmental concerns. The result also shows that increasing environmental awareness amongst the consumers is an effective way to drive the firm’s green investment.
Highlights
The issues that are related to the environment have received a large amount of attention over the last several years
Policy makers have been aware of the environmental issues and are introducing different environmental protection policies to regulate the behavior of economic agents in green technology investment
We investigated a three-stage game between a firm and a regulator, where the firm makes the long-run green technology investment in the first stage, the regulator sets its emission tax/subsidy rate in the second stage, and the firm choose its sale price in the final stage
Summary
The issues that are related to the environment have received a large amount of attention over the last several years. Have argued that the regulator should adopt a dynamic tax/subsidy system This results in the failure of the policy to extend its commitment power to the long run and might cause the economic agents to behave opportunistically [2,3]. Dewit and Leahy [3] proposed a game model, in which the firm is the leader to make its decision to affect the regulator’s policy. The regulator decides on the tax/subsidy level in response to the green technology investment of the firm with a trade-off between economic and environmental profit.
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