Consumers' environmental awareness and endogenous managerial delegation choice between sales and environmental incentives

Abstract

This study considers consumers' environmental awareness (CEA) and examines firms' managerial delegation contracts between sales and environmental performance incentives under different competition modes. Under sales delegation contracts, quantity competition yields higher sales incentives and better environmental performance, whereas welfare depends on marginal environmental damage. Under environmental delegation contracts, however, price competition yields higher environmental incentives and welfare, whereas environmental performance depends on CEA. Then, we discover that environmental delegation contracts result in higher abatement levels and better environmental and social performances than sales delegation contracts, regardless of competition modes; bilateral environmental (sales) delegation contracts can be an equilibrium in an endogenous delegation choice game when CEA is high (low). Finally, we examine a successive endogenous competition mode choice game and determine that unless CEA is sufficiently high, firms choose a quantity contract followed by either sales or environmental delegation contracts, leading to socially undesirable outcomes.