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Signaling environmental quality to green consumers and the incentive to invest in cleaner technology: Effect of environmental regulation

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  • Aditi Sengupta

    (Southern Methodist University)

Abstract

I consider an imperfectly competitive industry where firms signal the environmental attribute of their production technology through prices to environmentally conscious consumers that are not informed about the environmental damage caused by firms but are willing to pay more for "cleaner" products. I analyze the effect of changes in the level of environmental regulation on signaling behavior of firms and their incentive to develop cleaner technology. While cleaner firm types charge higher prices when regulation is weak, higher price does not signal better environmental performance when regulation is sufficiently stringent. With weak regulation, a monopolist has absolutely no incentive to invest in the development of a potentially less damaging technology even though consumers are willing to pay more for the product. This incentive is positive when regulation is strong enough. In a more competitive market structure (duopoly with price competition), firms may have strategic incentive to invest even when regulation is weak.

Suggested Citation

  • Aditi Sengupta, 2010. "Signaling environmental quality to green consumers and the incentive to invest in cleaner technology: Effect of environmental regulation," Departmental Working Papers 1001, Southern Methodist University, Department of Economics.
    • Handle: RePEc:smu:ecowpa:1001
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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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