Climate Change: Risk, Reputation, and Mechanism Design

This paper investigates the interaction between consumers and producers in designing incentive mechanism for climate protection. Firms have material interests in building a moral reputation for those consumers who prefer buying from socially responsible firms. We examine optimal monetary transfer by addressing a crowding out effect due to reputation. We find that a green reputation leads to over-adaptation by the firm if the consumers are green buyers and a brown firm prefers to buy a reputation. A firm tends to exploit its private information on the consumers’ green preference to extract information rents.