Switching to Green: The Timing of Socially Responsible Innovation

• Published date: 01 September 2014
• Date: 01 September 2014
• Author: Alberto Galasso,Mihkel Tombak
• DOI: http://doi.org/10.1111/jems.12064

Switching to Green: The Timing of Socially

Responsible Innovation

ALBERTO GALASSO

Institute for Management and Innovation,

University of Toronto,

Mississauga, ON, Canada

alberto.galasso@rotman.utoronto.ca

MIHKEL TOMBAK

Institute for Management and Innovation,

University of Toronto,

Mississauga, ON, Canada

mihkel.tombak@rotman.utoronto.ca

We develop a timing game for adopting a product technology that features a public good. We

investigate the effects of the degree of product market competition, product differentiation, the

private benefits from contributing to the public good, and firm asymmetries on the timing of

adoption. We then examine the effects of consumer subsidies on equilibrium timings and the

proliferation of the public good.

1. Introduction

Adoption of new technologies is a key determinant of the pace of economic growth

and the rate of change of productivity. The literature on the timing of adoption of new

technologies is extensive.1In this paper, we contribute to this literature by considering

the adoption of “green” technologies, by which we mean technologies that in consump-

tion provide a public good. Understanding the green technology adoption process is

important because there is substantial pressure on policy makers around the globe to

address environmental concerns. Toidentify the key trade-offs faced by private firms in

developing, adopting, and marketing green technologies is essential to evaluate whether

government intervention is beneficial and, if required, to design and assess policies that

induce private industries to accelerate the adoption of such technologies.

We develop a model of a game of timing for the adoption of “green” technologies

that in consumption generate public good benefits. In the environmental case, that

public good is an absence of pollution, which is of benefit to all consumers. Our modeling

approach follows Bagnoli and Watts(2003) and Besley and Ghatak (2007), who formulate

a static model of private provision of a public good whereby a segment of consumers

The authors areparticularly grateful to the Editor Daniel Spulber a Co-Editor and two referees whose insightful

comments led to a substantial improvement of the paper.The authors thank Tanjim Hossain, Nicola Lacetera,

Gabor Virag, and seminar participants at the University of Rochester, UC Davis, and the EARIE conference

for their helpful comments and suggestions. The authors gratefully acknowledge the financial support of the

Social Science and Humanities Research Council (SSHRC) of Canada and of the Michael Lee-Chin Family

Institute for Corporate Citizenship.

1. See, for example, Millou and Petrakis (2011), Dutta et al. (1995), Quirmbach (1986), Reinganum (1981),

Jensen (1982, 1983), Riordan (1992), Stenbacka and Tombak(1994), and especially Fudenberg and Tirole (1985)

and Katz and Shapiro (1987). For good surveys of the literature, see Reinganum (1989) and, more recently,

Hoppe (2002).

C2014 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume23, Number 3, Fall 2014, 669–691

670 Journal of Economics & Management Strategy

obtains private value from consuming the public good and are willing to pay more for

it. Even if, in practice, there may be disagreements on the public good benefits of green

products, our model assumes that “green” technologies produce goods that everyone

agrees are public goods.

Westudy how the private benefits from contributing to the public good affect which

firm adopts the green technology and the timing of such an adoption. We analyze this

model under different degrees of product market competition (Bertrand or Cournot),

different levels of firm asymmetry, and different policy regimes, resulting in three key

theoretical findings. First, we find that when firms have similar cost structures, tougher

product market competition (Bertrand) leads to earlier adoption of the green technology.

Second, we find that when firms are asymmetric, the identity of the innovating firm

depends on the private benefits from contributing to the public good. If these benefits

are small (large), the small (large) firm will adopt the green technology.

Finally, we look at the impact on social welfareof subsidies to consumers of green

products. Our analysis shows that in some environments these subsidies may not be

welfare enhancing and that equilibrium adoption time may be sooner than the socially

optimal adoption time. This may occur because adoption relaxes product market com-

petition by generating product differentiation and the rent seeking incentives generated

by this “green differentiation” induce firms to adopt too early.

In our analysis, Corporate Social Responsibility (CSR) arises from strategic be-

havior motivated by self-interest and profit maximization. There are many alternative

explanations for such CRS, which we do not examine here. For example, there may

be shareholder preferences for investing in firms which exhibit CSR behavior and there

may be different relative efficienciesof corporate versus private donations (Baron, 2007).

We also do not consider the existence of activist-induced social pressure (as in Baron,

2009) albeit that may well be a mechanism for affecting the private benefits from con-

tributing that are in our model. Furthermore, there are many other instrumentsavailable

to policy makers, which we do not investigate here. For instance, governments may use

technology standards (as in Calveras et al., 2007).

We organize our study as follows. First, we develop the model of a game of

timing, we describe the profit functions of the firms and then the utility functions of

the consumers who purchase the products of those firms. We then analyze the timing

outcomes under different forms of product market competition (Bertrand and Cournot).

Subsequently, we examine the equilibrium timing when firms are asymmetric in their

production costs. In Section 5, we study the effectiveness of consumer subsidies in

accelerating adoption of new technology and their impact on dynamic social welfare.

We examine extensions in Section 6. In the final section, we summarize and discuss the

results. The Appendix contains the proofs of all the results stated in the text.

2. Model

We develop a simple model that captures technology adoption to provide a socially

responsible product under rivalry between two firms. Our model extends the technology

adoption games of Fudenberg and Tirole (1985), Katz and Shapiro (1987), and Riordan

(1992) by introducing the private provision of public goods as modeled in Bagnoli and

Watts (2003) and Besley and Ghatak (2007).

2.1 Firms

Weindex two firms by i=1, 2. At time zero, each firm sells a standard product and at each

pointintimehastheoptiontoswitchtoagreen product. The green product differs from