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Fat-tail Climate Risks, Mechanism design, and Reputation

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  • Banerjee, Prasenjit
  • Shogren, Jason F.

Abstract

This paper investigates the interaction between consumers and producers in designing incentive mechanism for climate protection. Firms have material interests in building a moral reputation for those consumers who prefer buying from socially responsible firms. We examine optimal monetary transfer by addressing crowding out effect due to reputation. We find green reputation leads to overprotection and brown firms buy reputation if consumers have strong preference on green products. When consumers care less about firms’ reputation, firms do not have any incentive to buy reputation.

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File URL: http://purl.umn.edu/124920
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Bibliographic Info

Paper provided by Agricultural and Applied Economics Association in its series 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington with number 124920.

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Date of creation: 04 Jun 2012
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Handle: RePEc:ags:aaea12:124920

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Keywords: Asymmetric Information; Climate change; Crowding out; Mechanism Design; Reputation.; Consumer/Household Economics; D02; D03; Q15; Q34; Q57;

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  1. Weitzman, Martin L., 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," Scholarly Articles 3693423, Harvard University Department of Economics.
  2. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers 709, Cowles Foundation for Research in Economics, Yale University.
  3. Samuel Bowles & Sung Ha Hwang, 2008. "Social Preferences and Public Economics: Mechanism design when social preferences depend on incentives," UMASS Amherst Economics Working Papers 2008-06, University of Massachusetts Amherst, Department of Economics.
  4. Sandeep Baliga & Eric Maskin, 2003. "Mechanism Design for the Environment," Levine's Working Paper Archive 506439000000000341, David K. Levine.
  5. Dan Ariely & Anat Bracha & Stephan Meier, 2007. "Doing good or doing well? Image motivation and monetary incentives in behaving prosocially," Working Papers 07-9, Federal Reserve Bank of Boston.
  6. M.A. Nowak & K. Sigmund, 1998. "Evolution of Indirect Reciprocity by Image Scoring/ The Dynamics of Indirect Reciprocity," Working Papers ir98040, International Institute for Applied Systems Analysis.
  7. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November.
  8. Martin L. Weitzman, 2010. "GHG Targets as Insurance Against Catastrophic Climate Damages," NBER Working Papers 16136, National Bureau of Economic Research, Inc.
  9. Robert N. Stavins, 1998. "What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 69-88, Summer.
  10. Frey, Bruno S & Jegen, Reto, 2001. " Motivation Crowding Theory," Journal of Economic Surveys, Wiley Blackwell, vol. 15(5), pages 589-611, December.
  11. Laffont, Jean-Jacques, 1995. "Regulation, moral hazard and insurance of environmental risks," Journal of Public Economics, Elsevier, vol. 58(3), pages 319-336, November.
  12. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
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