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Investment in cleaner technology and signaling distortions in a market with green consumers

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  • Sengupta, Aditi

Abstract

I analyze the pricing and investment behavior of a firm that signals the environmental attributes of its production technology through its price to uninformed environmentally conscious consumers. I then analyze the effect of change in environmental regulation on the signaling outcome and the firm's ex ante incentive to invest in cleaner technology. When regulation is weak, a firm signals cleaner technology through higher price; in this case, the firm earns lower profit when it has cleaner technology and thus, has no incentive to invest in cleaner technology. The price charged by the clean firm declines sharply beyond a critical level of regulation. When regulation is sufficiently stringent, the firm with cleaner technology charges lower price but earns higher signaling profit, and ex ante the firm has positive incentive to invest in cleaner technology. With weak regulation, the incentive of the firm to directly disclose its environmental performance rather than signal it through price is increasing in the level of regulation; the opposite holds when regulation is sufficiently stringent.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 64 (2012)
Issue (Month): 3 ()
Pages: 468-480

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Handle: RePEc:eee:jeeman:v:64:y:2012:i:3:p:468-480

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Web page: http://www.elsevier.com/locate/inca/622870

Related research

Keywords: Environmental consciousness; Environmental regulation; Incomplete information; Investment; Signaling;

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Cited by:
  1. Slađana Pavlinović, 2013. "Signalling Green Technology Through Price And Eco-Label," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, Constantin Brancusi University, Faculty of Economics, vol. 6, pages 87-94, December.
  2. L. Lambertini & G. Pignataro & A. Tampieri, 2014. "Green Consumers, Greenwashing and the Misperception of Environmental Quality," Working Papers, Dipartimento Scienze Economiche, Universita' di Bologna wp958, Dipartimento Scienze Economiche, Universita' di Bologna.

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