A game-theoretic analysis of environmental behaviour at the corporate and global level

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. Finally, we discuss future research, specifically noting that a gap in the literature should be filled by developing a model that combines corporate and global environmental incentives.