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

67 Pages Posted: 14 Jan 2016 Last revised: 29 Oct 2019

See all articles by Xin Wang

Xin Wang

Hong Kong University of Science & Technology (HKUST) - Dept. of Industrial Engineering and Decision Analytics

Soo-Haeng Cho

Carnegie Mellon University - Tepper School of Business

Alan Andrew Scheller-Wolf

Carnegie Mellon University

Date Written: June 25, 2019

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 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. Surprisingly, uncertainty in the payoff can also 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.

Keywords: Environment, global game, regulation, sustainability, technology

Suggested Citation

Wang, Xin and Cho, Soo-Haeng and Scheller-Wolf, Alan Andrew, Green Technology Development and Adoption: Competition, Regulation, and Uncertainty - A Global Game Approach (June 25, 2019). Available at SSRN: https://ssrn.com/abstract=2714538 or http://dx.doi.org/10.2139/ssrn.2714538

Xin Wang

Hong Kong University of Science & Technology (HKUST) - Dept. of Industrial Engineering and Decision Analytics ( email )

Hong Kong

Soo-Haeng Cho (Contact Author)

Carnegie Mellon University - Tepper School of Business ( email )

Pittsburgh, PA 15213-3890
United States

Alan Andrew Scheller-Wolf

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
268
Abstract Views
967
rank
115,828
PlumX Metrics