Government incentive contract design for carbon reduction innovation considering market value under asymmetric information

The government often provides incentives for manufacturer to improve carbon reduction from low-carbon products through carbon reduction innovation, but the manufacturer’s carbon reduction innovation effort may be private information, so designing optimal incentive contract is key to success. Considering the market value of carbon reduction innovation, we design optimal incentive contracts including the fixed subsidy and incentive coefficient under three situations of symmetric information, asymmetric information without monitoring, and asymmetric information with monitoring. We obtain the manufacturer’s optimal effort and expected utility, and the government’s expected environmental utility and expected utility, and analyse the value of market, information, and monitoring. The results show that the market value promotes optimal effort and environmental utility in all situations. Asymmetric information reduces optimal effort and environmental utility. Therefore, the government can introduce monitoring contract to increase optimal effort and environmental utility when the monitoring cost is below a certain threshold value. Interestingly, under symmetric information contract or monitoring contract, increasing the market value can unexpectedly reduce the government’s expected utility when the manufacturer’s risk aversion is high enough. Further, the adoption of symmetric information contract and monitoring contract by the government is better for environmental improvement than that of asymmetric information contract.