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   Communicating Clean Technology: Green Premium, Competition, and Ecolabels (Revise and resubmit requested from Journal of Economics Management and Strategy).

In markets where differences in environmental performance of competing firms arise due to differences in technology that cannot be altered in the short run and firms have private information about their actual environmental impacts, an ecolabel may allow firms to directly and credibly communicate their private information to environmentally conscious consumers. This may ameliorate the distortions in pricing and consumption patterns that occur when price signaling is the only channel of communicating private information. In an incomplete information duopoly market, I show that competition creates a strategic disincentive for the adoption of ecolabels by clean firms (even if the cost of adoption is negligible); firms adopt ecolabels only if the green premium that buyers are willing to pay is large relative to the production cost advantage of dirty firms. In the latter case, the availability of an ecolabel makes competition more intense, reduces market power, increases market shares of the clean firms, and lowers the expected environmental damage. However, I show that the availability of credible ecolabels may reduce the strategic (long run) incentive of firms to invest in the development of clean technology and the total investment. Further, increase in the green premium that buyers are willing to pay may have a perverse effect on such investment.

Is the Arsenic Rule Affordable? (with Daniel Gingerich and Mark Barnett), The Journal of American Water Works Association, 2017.

We compare different methods (viz., the United States Environmental Protection Agency’s current expenditure margin affordability method, its proposed incremental burden method, and other methods based on below-median household income thresholds) that are primarily used to assess the affordability of the arsenic rule. We use the original cost estimates from 2000 and some actual cost data reported in 2010 to critically analyze the affordability of the revised arsenic rule. We find that the arsenic rule is affordable for all systems only under the current expenditure margin method; according to all other methods, between 24-83% of U.S. community water systems examined had unaffordable arsenic removal.  Using the recently available USEPA Arsenic Removal Demonstration Project in 2010, 0-22 of the forty systems (0-55%) have unaffordable arsenic removal treatment.  Further, we argue that affordability methods based on a 25th percentile income (with additional criteria to identify economically disadvantaged communities) most closely matches the purpose of drinking water affordability.

Product Differentiation and Relative Performance Evaluation in an Asymmetric Duopoly, Economics Bulletin, 2017. 

In a model of managerial delegation in a duopoly with asymmetric costs, I show that an increase in the intensity of market competition (product differentiation) increases the absolute weight placed on rival's profit (relative performance) in the managerial compensation scheme for both firms and also increases market concentration. The relatively efficient (larger) firm always places higher weight on rival's performance and obtains higher market share.
   

Investment Secrecy and Competitive R&D, The B. E. Journal of Economic Analysis and Policy, 2017.

Secrecy about investment in research and development (R&D) can promote greater technological change and higher social welfare in competitive industries. In a duopoly where each firm has private information about its actual production technology (or cost) and firms engage in cost reducing R&D with uncertain outcomes prior to engaging in price competition, the equilibrium outcome when firms do not observe the R&D investment chosen by the rival (investment secrecy) yields higher investment, social welfare, and industry profit compared to the outcome when R&D investment levels of firms are publicly observable. Government intervention to secure disclosure of R&D investments may be counterproductive; trade secret laws that protect privacy of information related to R&D inputs or investment may be helpful.

Competitive Investment in Clean Technology and Uninformed Green Consumers, Journal of Environmental Economics and Management, 2015, Volume 71.

In a market where consumers and the regulatory authorities 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 firms' 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 an expected liability on firms in this setting. Compared to full information, incomplete information generates higher strategic incentive to invest in cleaner technology particularly when consciousness and/or expected liability are not too high. Requiring mandatory disclosure of technology or environmental performance may discourage such investment. Even though consumers and the regulator are uninformed, competition has a positive effect (relative to monopoly) on the incentive to invest.

Investment in Cleaner Technology and Signaling Distortions in a Market with Green Consumers, Journal of Environmental Economics and Management, 2012, Vol. 64, Issue 3.

I analyze the pricing and investment behavior of a firm that signals the environmental attributes of its production technology through its price to uninformed environmentally conscious consumers. I then analyze the effect of change in environmental regulation on the signaling outcome and the firm’s ex ante incentive to invest in cleaner technology. When regulation is weak a firm signals cleaner technology through higher price; in this case, the firm earns lower profit when it has cleaner technology and thus, has no incentive to invest in cleaner technology. The price charged by the clean firm declines sharply beyond a critical level of regulation. When regulation is sufficiently stringent, the firm with cleaner technology charges lower price but earns higher signaling profit, and ex ante the firm has positive incentive to invest in cleaner technology. With weak regulation, the incentive of the firm to directly disclose its environmental performance rather than signal it through price is increasing in the level of regulation; the opposite holds when regulation is sufficiently stringent.

Environmental Regulation and Industry Dynamics, The B.E. Journal of Economic Analysis & Policy, 2010, Volume 10, Issue 1, Topics.

We examine the effect of more stringent environmental regulation on the dynamic structure of a deterministic competitive industry with endogenous entry and exit where firms invest in reduction of their future compliance cost. The level of regulation is exogenously fixed and constant over time. The compliance cost of a firm at each point of time depends on its current output, its accumulated past investment and the level of regulation. We outline sufficient conditions under which industries with more stringent regulation are associated with higher investment in compliance cost reduction and higher shake-out of firms over time; the opposite may be true under certain circumstances. Our analysis indicates that the effect of a change in regulation on market structure may be lagged over time.

Environmental Regulations and Economic Activity: Influence on Market Structure, (with Daniel Millimet and Santanu Roy) Annual Review of Resource Economics, 2009 Vol. 1: 99-117.

We survey recent developments in the theoretical and empirical literature on the economic effects of environmental regulation on various aspects of market structure including entry, exit, and size distribution of firms and market concentration.