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Green Technology Development and Adoption: Competition, Regulation, and Uncertainty—A Global Game Approach
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Green Technology Development and Adoption: Competition, Regulation, and Uncertainty—A Global Game Approach

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  • Xin Wang

    (Department of Industrial Engineering and Decision Analytics, The Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong;)

  • Soo-Haeng Cho

    (Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • Alan Scheller-Wolf

    (Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract

When a government agency considers tightening a standard on a pollutant, the agency often takes into account the proportion of firms that are able to meet the new standard (what we refer to as the industry’s “voluntary adoption level”) because a higher proportion indicates a more feasible standard. We develop a novel model of regulation in which the probability of a stricter standard being enacted increases with an industry’s voluntary adoption level. In addition, in our model, the benefit of a new green technology is both uncertain and correlated across firms, and firms’ decisions exhibit both strategic substitutability (because the marketing benefit of a new green technology decreases as more firms adopt it) and complementarity (because the stricter standard is more likely to be enforced as more firms adopt it). To analyze such strategic interaction among firms’ decisions under correlated and uncertain payoffs, we use the global game framework recently developed in economics. Our analysis shows that regulation that considers an industry’s voluntary adoption level, compared with regulation that ignores it, can more effectively motivate development of a new green technology. Interestingly, uncertainty in the payoff can, in some situations, help promote development of a new green technology. Finally, we find that more aggressive regulation (a higher probability of enforcing a stricter standard for a given voluntary adoption level) encourages more firms to adopt a green technology once the technology becomes available but may discourage a firm from developing it in the first place when facing intense competition. Therefore, for an industry with intense competition, a government agency should exercise caution about being too aggressive with regulation, which could potentially stifle innovation.

Suggested Citation

  • Xin Wang & Soo-Haeng Cho & Alan Scheller-Wolf, 2021. "Green Technology Development and Adoption: Competition, Regulation, and Uncertainty—A Global Game Approach," Management Science, INFORMS, vol. 67(1), pages 201-219, January.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:1:p:201-219
    DOI: 10.1287/mnsc.2019.3538
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    24. Wenwen Wang & Linzhao Xue & Ming Zhang, 2023. "Research on environmental regulation behavior among local government, enterprises, and consumers from the perspective of dynamic cost of enterprises," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(1), pages 917-937, January.

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