Investment in Cleaner Technology and Signaling Distortions in a Market with Green Consumers

Aditi Sengupta

No auwp2011-10, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: I analyze the pricing and investment behavior of a firm that signals the environmental attribute 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 (signaling distortion of profit) is increasing in the level of regulation, but the opposite holds when regulation is sufficiently stringent.

Keywords: Environmental consciousness; Environmental regulation; Incomplete information; Investment; Signaling (search for similar items in EconPapers)
JEL-codes: D42 D43 D82 L51 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-cta, nep-env and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Investment in cleaner technology and signaling distortions in a market with green consumers (2012)
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