‘Green’ managerial delegation theory

Domenico Buccella,Luciano Fanti,Luca Gori

doi:10.1017/s1355770x21000206

Domenico Buccella, Luciano Fanti + Show 1 more

Open Access

https://doi.org/10.1017/s1355770x21000206

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Abstract

AbstractThis article develops a non-cooperative game with managerial quantity-setting firms in which owners choose whether to delegate output and abatement decisions to managers through a contract based on emissions (conventionally denoted as ‘green’ delegation, GD) instead of sales (sales delegation, SD), and the government levies an emissions tax to incentivise firms’ emissions-reduction actions. First, it compares the Nash equilibrium outcomes between GD and SD and then contrasts them also with profit maximisation (PM). A plethora of Nash equilibria emerges, especially in the case GD versus PM (the ‘green delegation game’), depending on the public awareness toward environmental quality, ranging from the coordination game to the ‘green’ prisoner's dilemma. Second, though the contract under GD incentivises managers for emissions, the environmental damage is lower than under SD. This is because the optimal tax more than compensates the incentive for emissions. These findings suggest that designing GD contracts paradoxically favours environmental quality.

Highlights

According to a report issued by KPMG (2017), the majority (67 per cent) of firms belonging to the G250 Fortune Index – a list of the largest 250 multinationals – has revealed targets to cut carbon emissions
This article investigates the owners’ decision of whether to delegate to managers the choice of pollution abatement in a Cournot duopoly with homogeneous goods and pollution externalities. It assumes the existence of a government whose aim is to maximise social welfare using an emissions tax to incentivise firms to undertake emissions-reduction actions (Buccella et al, 2021)
First the government fixes the emissions tax, and owners strategically choose whether to retain the choices of the abatement and output levels or delegate those decisions to a manager via an incentivising emissions contract or a standard sales contract, after having selected the optimal incentive at the bonus stage

Summary

Introduction

According to a report issued by KPMG (2017), the majority (67 per cent) of firms belonging to the G250 Fortune Index – a list of the largest 250 multinationals – has revealed targets to cut carbon emissions. These companies are generally characterised by the separation between ownership and control, which is delegated to managers. At stage three (the market stage), either owners simultaneously choose the optimal levels of output and abatement or delegate them to managers designing a standard SD contract or a delegation contract based on emissions In this context, the article studies and compares three different games, always considering a firm’s abatement activity and a government’s activity through emissions taxes to incentivise firms’ emissions-reduction actions: (1) GD versus profit maximisation (PM); (2) SD versus PM; (3) GD versus SD. In the games in which owners choose whether to delegate under SD versus GD or PM, the SD contract always emerges as the unique pure-strategy Pareto-inefficient Nash equilibrium Both the environmental damage and social welfare under SD are larger than the corresponding values under GD or PM. The supplementary material online includes: (i) the welfare analysis, (ii) analytical details (appendices A and B), and (iii) an extension of the basic model with horizontal product differentiation (appendix C)

Literature review

The model with homogeneous products

Result

Findings

Discussion and concluding remarks