Competitive Investment in Clean Technology and Uninformed Green Consumers

In a market where consumers are not fully informed about the actual production technology or environmental performance of firms that engage in strategic competition, I study the effect of environmental consciousness of consumers on the incentive to invest in cleaner technology. Firms compete in prices and may signal their environmental performance to uninformed consumers through prices. I also analyze the effect of environmental regulation of firms in this setting. Compared to full information incomplete information generates higher strategic incentive to invest in cleaner technology particularly when consciousness and/or regulation is not too high which appears to fit the current reality in many industries. Thus, requiring mandatory disclosure of technology or environmental performance may discourage such investment. Even though consumers are uninformed, competition has a positive effect (relative to monopoly) on the incentive to invest. The fact that (in contrast to full information) under incomplete information higher environmental consciousness and/or regulation may reduce the incentive to invest in clean technology has important implication for public policy design as well as for environmental activists’campaign to increase green consciousness. JEL Classification: D42, D43, D82, L51. Key-words: Duopoly; Environmental consciousness; Environmental regulation; Incomplete information; Investment; Mandatory disclosure; Signaling.