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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.

Suggested Citation

  • Sengupta, Aditi, 2012. "Investment in cleaner technology and signaling distortions in a market with green consumers," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 468-480.
  • Handle: RePEc:eee:jeeman:v:64:y:2012:i:3:p:468-480
    DOI: 10.1016/j.jeem.2012.04.001
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    1. Eirik S. Amundsen & Lars Gårn Hansen & Hans Jørgen Whitta-Jacobsen, 2018. "Regulation of Location-Specific Externalities," CESifo Working Paper Series 7369, CESifo.
    2. Giallonardo Luisa & Mulino Marcella, 2016. "Strategic CSR, Heterogeneous Firms and Credit Constraints," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(4), pages 1-19, October.
    3. Yantao Ling & Jing Xu, 0. "Price and greenness competition between duopoly firms considering consumer premium payments," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 0, pages 1-28.
    4. Luca Lambertini & Giuseppe Pignataro & Alessandro Tampieri, 2014. "Green Consumers, Greenwashing and the Misperception of Environmental Quality," DEM Discussion Paper Series 14-21, Department of Economics at the University of Luxembourg.
    5. Corinne Langinier & Amrita Ray Chaudhuri, 2020. "Green Technology and Patents in the Presence of Green Consumers," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 7(1), pages 73-101.
    6. Xuexian Gao & Haidong Zheng & Yan Zhang & Naser Golsanami, 2019. "Tax Policy, Environmental Concern and Level of Emission Reduction," Sustainability, MDPI, Open Access Journal, vol. 11(4), pages 1-17, February.
    7. Jason M. Walter, 2018. "Understanding the dynamics of clean technology: implications for policy and industry," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 20(2), pages 365-386, April.
    8. Yantao Ling & Jing Xu, 2021. "Price and greenness competition between duopoly firms considering consumer premium payments," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 23(3), pages 3853-3880, March.
    9. Li, Yuanhao & van 't Veld, Klaas, 2015. "Green, greener, greenest: Eco-label gradation and competition," Journal of Environmental Economics and Management, Elsevier, vol. 72(C), pages 164-176.
    10. Philippe Mahenc & Alexandre Volle, 2021. "Price Signaling and Quality Monitoring in Markets for Credence Goods," Working Papers hal-03098440, HAL.
    11. Lambertini, Luca & Pignataro, Giuseppe & Tampieri, Alessandro, 2020. "The effects of environmental quality misperception on investments and regulation," International Journal of Production Economics, Elsevier, vol. 225(C).
    12. Yi Li, 2019. "Apportioning indivisible damage and strategic diffusion of pollution abatement technology," Journal of Economics, Springer, vol. 126(1), pages 19-42, January.
    13. Gu, Wenjun & Chhajed, Dilip & Petruzzi, Nicholas C. & Yalabik, Baris, 2015. "Quality design and environmental implications of green consumerism in remanufacturing," International Journal of Production Economics, Elsevier, vol. 162(C), pages 55-69.
    14. Philippe Mahenc & Alexandre Volle, 2021. "Price Signaling and Quality Monitoring in Markets for Credence Goods," CEE-M Working Papers hal-03098440, CEE-M, Universtiy of Montpellier, CNRS, INRA, Montpellier SupAgro.
    15. Bin Liu & Tao Li & Sang-Bing Tsai, 2017. "Low Carbon Strategy Analysis of Competing Supply Chains with Different Power Structures," Sustainability, MDPI, Open Access Journal, vol. 9(5), pages 1-21, May.
    16. Sladana Pavlinovic, 2013. "Signalling Green Technology Through Price And Eco-Label," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 6, pages 87-94, December.

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    More about this item

    Keywords

    Environmental consciousness; Environmental regulation; Incomplete information; Investment; Signaling;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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