|Authors: Richard Fairchild and Baris Yalabik, School of Management, University of Bath, UK
With our planet’s environment facing increasing threat of irreparable damage,
academics, practitioners, and policy-makers are becoming more focused on the incentives
of individuals, corporations, and governments to act in the interests of the environment.
Since the environment is a public good, private incentives may be misaligned. Hence,
game theory provides an ideal tool to examine environmental problems.
In this paper, we review the existing game-theoretic approach to the environmental
behaviour of corporations and governments. The literature reveals that, at the corporate
level, environmental incentives are driven by market forces (the existence of ‘green’
consumers and investors), and regulation. Hence, game-theoretic approaches within the
industrial organisation field are particularly appropriate. At the global level, where
governments make international environmental agreements (IEAs), the situation
resembles a prisoner’s dilemma, where each nation is tempted to break the IEA, and
‘free-ride’ on the other nations’ abatement efforts.
After reviewing the literature, we make our own contributions, at both the corporate
and global levels. At the corporate level, we develop a benchmark monopoly model of
corporate environmental behaviour. We then compare our results with those of
Fairchild’s (2008) duopoly model, and Bagnoli and Watts (2003) oligopoly model. This
provides an insight into the inter-relationship between market structure, consumers’
environmental preferences, and corporate environmental behaviour.
Next, we develop a behavioural game theoretic approach to global environmental
agreements, in order to determine whether psychological factors, such as empathy, guilt
and anger, can mitigate governmental free-riding, and sustain IEAs.