Environmental awards in a duopoly with green consumers

Heidelmeie , Lisa; Sahm, Ma co
Wo king Pape
En i onmen al awa ds in a duopoly wi h g een consume s
BERG Wo king Pape Se ies, No. 207
P o ided in Coope a ion wi h:
Bambe g Economic Resea ch G oup, Bambe g Uni e si y
Sugges ed Ci a ion: Heidelmeie , Lisa; Sahm, Ma co (2025) : En i onmen al awa ds in a duopoly wi h
g een consume s, BERG Wo king Pape Se ies, No. 207, Bambe g Uni e si y, Bambe g Economic
Resea ch G oup (BERG), Bambe g,
h ps://doi.o g/10.20378/i b-108373
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En i onmen al Awa ds in a Duopoly
wi h G een Consume s
Lisa Heidelmeie and Ma co Sahm
Wo king Pape No. 207
May 2025
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En i onmen al Awa ds in a Duopoly
wi h G een Consume s∗
Lisa Heidelmeie †Ma co Sahm∗∗
This e sion: May 9, 2025
Abs ac
We in es iga e he impac o an en i onmen al awa d in a Be and duopoly
wi h g een consume s conside ing a h ee-s age game. Fi s , he egula o designs
he en i onmen al con es . Second, i ms choose hei g een in es men s, and he
winne o he con es is awa ded. Thi d, i ms compe e in p ices, and consump ion
akes place. We illus a e ha he awa d no only incen i izes g een in es men s
and may hus educe en i onmen al ex e nali ies. As consume s pe cei e he p od-
uc o he awa ded i m o be o supe io quali y, i also gi es ise o e ical p oduc
di e en ia ion. This induces ma ke powe , and hus an i-compe i i e e ec s: Ren s
shi om consume s o p oduce s, and consume su plus may dec ease, pa icula ly
i ma ginal in es men cos s in g een echnologies a e high compa ed o he s eng h
o en i onmen al damage.
Keywo ds: Be and Compe i ion; Con es s; En i onmen al Awa d; G een
Consume ; P oduc Di e en ia ion
JEL classi ica ion: D43, H23, L13, L51, Q52, Q58
∗We a e g a e ul o Fabian Die z, S ephan Ei el, S e anie Schmi , and pa icipan s a he 16 h RGS
Doc o al Con e ence in Economics, he 22nd Ba a ian Mic o Day, he 50 h Annual Con e ence o he
Eu opean Associa ion o Resea ch in Indus ial Economics, he Annual Con e ence o he Ve ein ¨u
Socialpoli ik 2023, he Innsb uck Win e School on C edence Goods, Incen i es and Beha io , he 29 h
Annual Con e ence o he Eu opean Associa ion o En i onmen al and Resou ce Economis s, he i o
Public Economics Wo kshop 2024, and esea ch semina s a he Uni e si y o Bambe g o aluable
commen s and sugges ions. Lisa Heidelmeie g a e ully acknowledges inancial suppo om he Hans-
B¨ockle -S i ung. A o me e sion o his pape ci cula ed unde he i le ’A Ve ically Di e en ia ed
Duopoly Model wi h En i onmen al Awa ds’.
†Uni e si y o Bambe g, Depa men o Economics, Feldki chens aße 21, 96052 Bambe g, Ge many.
∗∗Co esponding au ho : Uni e si y o Bambe g, Depa men o Economics, Feldki chens aße 21,
96052 Bambe g, Ge many; and CESi o, Poschinge s aße 5, 81679 Munich, Ge many. E-mail:
ma co.sahm@uni-bambe g.de, Telephone: +49–951–863–2728.
1 In oduc ion
T adi ional esponses o clima e change, such as emission ading o axa ion, a e pa ly
eaching hei limi s. The IPCC Six h Assessmen Repo wa ns ha global ne ca bon
emissions need o decline by 45% o 2010 le els by 2030 o each ne ze o by a ound 2050
(IPCC, 2022). The OECD (2017) unde sco es ha p omo ing policy packages o mobilize
in es men in ca bon neu al in as uc u e and echnologies is one o he key s eps o
comba global wa ming.
This pape analyzes an al e na i e incen i e and in e naliza ion measu e ha has
ha dly been s udied so a : en i onmen al awa ds. He e, indi iduals, i ms, o o ganiza-
ions decide o pa icipa e in an en i onmen al con es . Each pa icipan applies wi h his
en i onmen al e o . Then he con es akes place, and one con es winne is assigned
based on his en i onmen al pe o mance. En i onmen al awa ds a e inc easingly used, as
he Champions o he Ea h awa d, he UN Global Clima e Ac ion Awa d o he Ge man
Sus ainabili y Awa d show. Howe e , heo e ical suppo is lacking.
Fu he , we see ha a g owing ac ion o consume s p e e s o buy p oduc s om
i ms ha use en i onmen ally- iendly p oduc ion echnologies and accep s o pay a
highe p ice o g een goods.1This end opens up he possibili y o i ms o use g een
in es men s as s a egic a iables o di e en ia e om hei compe i o s and o elax p ice
compe i ion.
In his a icle, we elabo a e on he wo obse a ions named abo e: dealing wi h cu en
challenges o en i onmen al policy by means o a con es while obse ing consume s wi h
an inc easing willingness o pay o g een p oduc s. In o de o shape i ms’ incen i es, we
use a model o e ical p oduc di e en ia ion. Ve ical p e e ences imply ha consume s
p e e he good o highe pe cei ed en i onmen al quali y and a e willing o pay a highe
p ice o his good.
Mo e speci ically, o examine he e ec i eness o an en i onmen al con es , we conside
a Be and duopoly whe e he i ms’ p oduc s di e in he pe cei ed le el o en i onmen al
quali y. We analyze compe i ion be ween he wo i ms in he amewo k o a game wi h
h ee s ages: In he i s s age, he egula o designs he en i onmen al awa d, ha is,
he salience o he winne ’s p oduc . In he second s age, i ms decide simul aneously how
much o in es in en i onmen ally- iendly echnologies. A e obse ing he in es men
e o s, he con es winne is awa ded. The en i onmen al awa d e eals o consume s
which p oduc is (pe cei ed o be) he g eene one. In he hi d s age, i ms simul aneously
se hei ma ke p ices. The ea e , consume s make hei consump ion decisions.
Ou baseline model concen a es on a co e ed ma ke wi h uni demand: Each con-
sume buys exac ly one uni o he p oduc . Mo eo e , he con es is o ganized as an
all-pay auc ion. This e lec s he assump ion ha he con es designe can pe ec ly ob-
se e i ms’ in es men le els and hus awa ds he i m wi h he highes in es men le el.
We dis inguish be ween wo di e en objec i es o en i onmen al policy: The egula o
maximizes ei he wel a e ( o al su plus) o consume su plus.
Fo bo h objec i es, we ind ha he egula o implemen s he con es as long as he
i ms’ ma ginal g een in es men cos s a e no oo high in ela ion o he ma ginal s eng h
o en i onmen al damage. The wel a e maximizing awa d, howe e , will aise consume
su plus i and only i he ma ginal g een in es men cos s a e su icien ly low compa ed
1See, e.g., Wa d e al. (2011), Be ge (2019), Kuhn and Ule (2019), Hulsho and Mulde (2020),
Gomes e al. (2023), Eu opean Commission—Di ec o a e-Gene al o Communica ion. (2024), Rugge i
e al. (2024).
2

o he ma ginal s eng h o en i onmen al damage. O he wise, he wel a e maximizing
con es will be de imen al o consume s. In ui i ely, using an en i onmen al con es
induces he ollowing ade-o : On he one hand, he awa d mo i a es i ms o in es
in g een echnologies and, he eby, o in e nalize pa o he en i onmen al ex e nali y.
Consequen ly, consume s p o i om educed en i onmen al damage. Howe e , on he
o he hand, he awa d implies p oduc di e en ia ion ha con e s ma ke powe on i ms.
This leads o highe p ices and shi s en s om consume s o p oduce s. Compa ed o a
wel a e maximizing egula o , a egula o who maximizes consume su plus hus chooses
a lowe en i onmen al awa d and accep s highe en i onmen al damage.
The main esul s also hold o wo a ian s o he baseline model. In he ex ension
sec ion, we i s elax he assump ion o a co e ed ma ke . I some consume s s op buying
i he en i onmen al con es is ins alled, addi ional quan i y e ec s will a ise as consump-
ion le els dec ease. Secondly, we elax he assump ion ha he con es designe can
pe ec ly obse e in es men le els. To allow o some noise, he en i onmen al con es is
modeled as a lo e y: A i m can (ce e is pa ibus) inc ease i s p obabili y o winning he
awa d by inc easing i s in es men , bu he i m wi h he highe in es men does no win
o su e.
The emainde o he a icle is o ganized as ollows: Sec ion 2 e iews he ela ed
li e a u e. Sec ion 3 in oduces he baseline model and Sec ion 4 p esen s he main
esul s. In Sec ion 5, we discuss he wo ex ensions o he baseline model. Sec ion 6
concludes.
2 Rela ed Li e a u e
Ou pape con ibu es o wo s ands o he li e a u e: speci ically, models ha adop a
con es o in e nalize ex e nali ies, and, mo e gene ally, a icles ha highligh measu es
o make i ms’ en i onmen al pe o mance isible.
To c ea e an incen i e scheme o g een in es men , we de elop a heo e ical model
based on con es heo y.2Rela ed s udies a e ound in he public goods li e a u e, as
p o ec ing he quali y o he en i onmen can be in e p e ed as a public good. P e ious
wo k on con es s in he public goods li e a u e ocuses mainly on he e ec s o mone a y
p izes and playe he e ogenei y, as well as on co ec ing dis o ions in consump ion due o
axa ion (see, e.g., Mo gan, 2000; Giebe and Schweinze , 2014; Kolma and Sisak, 2014).3
Ano he , as ye small, ield o esea ch combines ma ke -based en i onmen al pol-
icy wi h con es heo y. MacKenzie e al. (2009) de elop a mechanism ha dis ibu es
emission pe mi s o i ms based on a ank-o de con es . Bos e al. (2016) implemen
a con es o incen i ize he o ma ion o in e na ional en i onmen al ag eemen s, ensu -
ing ha ha m ul emissions a e educed o he socially e icien le el wi hou sac i icing
p oduc i e e iciency.
Simila ly o ou app oach, wo ecen pape s by Oso io and Zhang incen i ize g een
in es men by applying a con es mechanism. In Oso io and Zhang (2022a), i ms compe e
o an en i onmen al subsidy. The au ho s compa e wo subsidy mechanisms: Fi ms
compe e by in es ing in g een p oduc ea u es o by in es ing in emission aba emen . The
2Fo an o e iew, see Kon ad (2009).
3Ano he b anch o he con es li e a u e uses poli ical con es s o model he p ocess o en i onmen al
egula ion unde lobbying, see, e.g., Heyes (1997), Lis on-Heyes (2001), Dijks a (2007), Ansink and
Weika d (2025).
3
a icle sugges s he g een p oduc ea u e design in indus ies wi h ela i ely high emission
le els and he aba emen design in indus ies wi h ela i ely low emission le els. In hei
second pape , Oso io and Zhang (2022b) examine di e en con es designs o de e mine
emission axes endogenously. They ind ha he op imal ax mechanism depends on he
le el o en i onmen al damage in he espec i e indus y.
The s udies su eyed abo e emphasize he wel a e-enhancing e ec s o con es s. In
con as , ou app oach e eals ha using a con es may also ha e an i-compe i i e e ec s
which, o ou knowledge, ha e no been aken in o accoun in p e ious esea ch. Ou main
con ibu ion is o p o ide a heo e ical amewo k o an en i onmen al awa d based on
con es heo y and a comp ehensi e analysis o how en i onmen al awa ds a ec consume
beha io .
Fi ms need o p omo e hei en i onmen ally- iendly image o a ac consume s o
hei g een p oduc s. One way o i ms o e eal hei en i onmen al e o s is by pa -
icipa ing in an en i onmen al con es . Ano he , mo e p e alen way, is o adop an
eco-label. The e is ex ensi e li e a u e on eco-labeling.4Cu en eco-labeling li e a u e
s esses ha he labeling design, i ms’ cos s uc u es, aba emen echnologies, and cos s
o eco-labeling de e mine he e ec i eness o eco-labels (see, e.g., Amache e al., 2004;
Ibanez and G olleau, 2008; Li and an’ Veld, 2015; Fische and Lyon, 2019). On he
consume side, en i onmen al consciousness, in o ma ion s uc u es, consume in o med-
ness, and al uism play a c ucial ole (see, e.g., B ´eca d, 2017; Heyes e al., 2020; Ghazzai
and Lahmandi-Ayed, 2021). Ben Yousse and Lahmandi-Ayed (2008) endogenously de-
e mine he labeling c i e ia ha maximize o al wel a e. Simila ly o ou pape , bu o
labels, Ben Yousse and Lahmandi-Ayed (2008) show ha in oducing an eco-label may
induce an i-compe i i e e ec s esul ing in p ice inc eases ha ha m consume s. B inging
oge he he li e a u e on en i onmen al awa ds and eco-labels, Heidelmeie and Schmi
(2025) compa e awa ds and labels as wo ins umen s ha allow i ms o d aw consume s’
a en ion o he en i onmen al quali y o hei p oduc s. In pa icula , he pape discusses
he impac o awa ds and labels on i ms’ in es men s in en i onmen al quali y and on
social wel a e. Heidelmeie and Schmi (2025) show ha a social wel a e maximizing eg-
ula o implemen s an en i onmen al awa d i and only i ma ginal damage and salience
o he en i onmen al quali y a e su icien ly high such ha consume s o e es ima e he
en i onmen al quali y o he awa ded and labeled goods.
Ou con es app oach s ands ou agains adi ional en i onmen al egula o y ins u-
men s (such as emission axa ion o ading sys ems) in e ms o i s posi i e in es men
incen i es: The en i onmen al con es allows i ms o di e en ia e hei p oduc s om
hose o hei compe i o s wi h espec o en i onmen al quali y. As p oduc s ge di e -
en ia ed, i ms can gene a e highe p o i s. Thus, he en i onmen al awa d incen i izes
i ms o pa icipa e olun a ily in he con es . Fi ms in es in g een echnologies and,
he eby, con ibu e o in e nalizing he en i onmen al ex e nali y. While adi ional in-
s umen s mainly concen a e on emission egula ion and sanc ions based on nega i e
incen i es, he con es mechanism se s posi i e in es men incen i es - simila o he
use o eco-labels. Many s udies examine eco-labeling as an incen i e mechanism o g een
echnology in es men , whe eas he li e a u e on en i onmen al awa ds is sca ce. Ye , Lai
e al. (2022) and Li e al. (2024) p o ide empi ical e idence ha en i onmen al awa ds
can indeed be a signi ican d i e o g een echnology inno a ion. Besides hese posi-
4Fo an o e iew, see Yokessa and Ma e e (2019) o an’ Veld (2020).
4
i e consequences, howe e , ou model also highligh s ha an en i onmen al awa d may
induce an i-compe i i e e ec s and ha m consume s.
3 Model
We examine a duopoly model o p ice compe i ion on a ma ke wi h an en i onmen al
ex e nali y and g een consume s. In p inciple, di e ences in he in ensi ies o he con-
sume s’ p e e ences o en i onmen al quali y gi e ise o e ical p oduc di e en ia ion
(Shaked and Su on, 1982; Mo a, 1993). We assume, howe e , ha a i m can (c edibly)
signal he (supe io ) en i onmen al quali y o i s p oduc only by winning an en i onmen-
al awa d. Designing he espec i e en i onmen al con es is he only ( emaining) policy
ool o a bene olen egula o who aims o in e nalize he en i onmen al ex e nali y in
o de o maximize social wel a e o , al e na i ely, consume su plus.
3.1 Fi ms
We conside a ma ke wi h p ice compe i ion be ween wo i ms. Each Fi m i∈ {1,2}
p oduces one e sion o a p oduc wi h (pe cei ed) en i onmen al quali y µiand sells i a
p ice pipe uni . Fo simplici y, we assume he (cons an ) ma ginal cos s o p oduc ion o
be ze o (Mo a, 1993). The p oduc ion o each uni o he good causes an en i onmen al
ex e nali y equal o 1 −xi, whe e xideno es Fi m i’s in es men in o en i onmen al
quali y. The ma ginal cos s o g een in es men s a e cons an and equal o c > 0. We
assume, howe e , ha nei he he i ms’ in es men s no he esul ing en i onmen al
quali ies a e di ec ly obse able by consume s.5Wi hou any ( u he ) in o ma ion on
Fi m i’s in es men , consume s pe cei e he i m’s en i onmen al quali y as µℓ, which we
in e p e as he minimum s anda d quali y.
3.2 Consume s
We conside a con inuum o consume s indexed by θ. The pa ame e θ ep esen s he
consume ’s ma ginal alua ion o en i onmen al quali y. Fo he sake o conc e eness,
we assume ha θis uni o mly dis ibu ed on he in e al [0,1]. We assume disc e e
choice and uni demand: Each consume has he same ese a ion p ice o a good wi h
en i onmen al quali y 0 and buys ei he none o exac ly one uni o he good, ei he om
Fi m 1 o om Fi m 2. Fo su icien ly la ge income y, he p e e ences o consume θ
can be desc ibed by he ollowing (indi ec ) u ili y unc ion (Mussa and Rosen, 1978):6
U(y, p, µ) = max{0,maxi∈{1,2}ui(y, p, µ)}, whe e
ui(y, p, µ) = +θµi−pi.(1)
In ou baseline model, we assume ha he ese a ion p ice is high enough o ensu e
ha he ma ke is co e ed, i.e., each consume buys exac ly one uni o he good, ei he
om Fi m 1 o om Fi m 2.7
5Fi ms’ en i onmen al quali y and he unde lying g een in es men s sa is y he c i e ia cha ac e izing
a c edence good: While goods a e o en di e en ia ed by hei en i onmen al quali y, e.g., low-emission
elec ici y, consume s may be unable o obse e hese di e ences, e en a e consump ion. The e o e,
consume s ha e o ely on ins umen s, as an awa d, o make i ms’ en i onmen al pe o mance isible.
6Pei z (1995) p o ides a ho ough ounda ion o his kind o modeling.
7In Sec ion 5, we elax his assump ion allowing o an unco e ed ma ke , whe e some consume s do
no buy any o he wo e sions o he good.
5
3.3 Regula o
We conside a bene olen egula o who is able o obse e he i ms’ en i onmen al in-
es men s. As he only ( emaining) ins umen o p o iding in es men incen i es and,
he eby, educing he en i onmen al ex e nali y, he egula o designs an en i onmen al
con es . In he baseline model, he con es is o ganized as an all-pay auc ion:8The i m
wi h he highe en i onmen al in es men wins he con es and ecei es he awa d. While
consume s pe cei e he lose ’s en i onmen al quali y as he minimum s anda d quali y µℓ,
hey pe cei e he winne ’s en i onmen al quali y as µw. We assume ha he egula o can
eely choose he winne ’s pe cei ed en i onmen al quali y µw≥µℓ, and e e o i as he
en i onmen al awa d. The awa d µwcan be in e p e ed as he a en ion-gene a ing e ec
o he con es ha may, e.g., depend on he egula o ’s publici y campaign ega ding he
con es .9We igno e he cos o he con es p og am, which is a easonable assump ion as
long as i is small compa ed o he en i onmen al ex e nali y and in es men s.
Below, we conside wo al e na i e objec i es he egula o may ha e: he maximiza-
ion o ei he o al wel a e (as he sum o p oduce su plus and ne consume su plus)
o ne consume su plus only. We de ine ne consume su plus as he di e ence be ween
consume su plus ne o consume s’ en i onmen al conce ns10 and he social loss caused
by he en i onmen al ex e nali y. Fo he sake o conc e eness, we assume a quad a ic
loss unc ion, L=δε2, whe e he pa ame e δ≥0 scales he damage associa ed wi h he
agg ega e ex e nali y ε.
3.4 Timing o e en s
We model he in e dependen decisions as a game wi h h ee s ages. In he i s s age, he
egula o decides upon he awa d o he winne o he en i onmen al con es , µw. In he
second s age, i ms choose simul aneously hei in es men s in en i onmen al quali y xi,
i∈ {1,2}, he con es akes place, and he winne ’s p oduc is awa ded. In he las s age,
i ms choose simul aneously he p ices pi,i∈ {1,2}, o hei so di e en ia ed p oduc s,
and consume s make hei consump ion decisions.
4 Analysis and Resul s
Be o e we desc ibe he decisions on he h ee s ages in mo e de ail and sol e he game by
backwa d induc ion o i s subgame-pe ec equilib ium, we b ie ly discuss he un egula ed
ma ke (laissez- ai e economy) as a benchma k.
8In Sec ion 5, we conside a lo e y con es as an al e na i e choice o modeling.
9The assump ion ha he egula o has ull con ol o e he pe cei ed en i onmen al quali ies is a
simpli ica ion. Implici ly, i es s upon a beha io al assump ion on consume s, e.g., limi ed a en ion o
awa eness: Consume s ecognize only he winne ’s en i onmen al e o , all he mo e he mo e salien he
awa d is. See, e.g., Eliaz and Spiegle (2011), Bo dalo e al. (2016), He i and Liu (2020), Ca oni e al.
(2023).
10I.e., agg ega ing indi idual u ili ies, he egula o includes only he ne u ili y om consump ion,
−pi, bu no he ex a su plus om en i onmen al quali y, θµi. The eason o his assump ion is
ha an unbiased egula o should ake in o accoun only he eal consequences o en i onmen al quali y
(i.e., he en i onmen al ex e nali y) bu no he pe cei ed ones (i.e., he consume s’ di e en g een
consciousness). Mo eo e , his keeps ou model ee om addi ional incen i es o he egula o o aise
µwin o de o inc ease consume su plus di ec ly (besides s imula ing g een in es men s).
6
ollowing analysis o a wel a e maximizing egula o . An unco e ed ma ke hus a ises i
< p∗
ℓ= (9c(10δ−9c))/(50δ).
5.1.1 S age 3: P ice game
In he hi d s age o he game, he awa ded i m, w, and he non-awa ded i m, ℓ, si-
mul aneously choose hei p ices pwand pℓ. Now, unde he assump ion o an unco e ed
ma ke , we ha e wo ma gins: Consume s decide whe he o buy he good p oduced by
he i m ha ing won he con es wi h pe cei ed en i onmen al quali y µwo o buy he
good p oduced by he i m ha ing los he con es wi h pe cei ed en i onmen al quali y
µℓo no o buy he good a all. As be o e, he ma ginal consume being indi e en
be ween he wo quali y le els is hus de ined by θ≡(pw−pℓ)/(µw−µℓ). Simila ly, he
ma ginal consume being indi e en be ween no buying and buying he good o pe cei ed
en i onmen al quali y µℓis desc ibed by θ≡(pℓ− )/µℓ.
Acco dingly, i ms’ demand unc ions a e Dw= 1 −θand Dℓ=θ−θ, whe e θis
he sha e o consume s no buying. Fi m i∈ {ℓ, w} hus chooses he p ice piin o de
o maximize i s p o i πi=pi·Di. We de i e he i ms’ bes esponse unc ions om
he i s -o de condi ions o solu ions o hese maximiza ion p oblems and use hem o
compu e he equilib ium. Lemma 3 summa izes he esul s.
Lemma 3. Assume ha he ma ke is unco e ed. Deno e by w(ℓ) he i m ha wins
(loses) he con es and o e s he pe cei ed en i onmen al quali y µw(µℓ). Then, hi d-
s age equilib ium p ices, ma ke sha es, and p o i s a e p∗
w= ((µw−µℓ)( + 2µw))/(4µw−
µℓ),p∗
ℓ= ((µw−µℓ)(2 +µℓ))/(4µw−µℓ)),D∗
w= ( + 2µw)/(4µw−µℓ),D∗
ℓ= (µw(2 +
µℓ))/(4µw−µℓ),π∗
w= ((µw−µℓ)( + 2µw)2)/(4µw−µℓ)2, and π∗
ℓ= (µw(µw−µℓ)(2 +
µℓ)2)/(µℓ(4µw−µℓ)2).
Lemma 3 shows ha he di e ence in p ices and p o i s is e en highe in he unco e ed
ma ke han in he co e ed ma ke .
5.1.2 S age 2: In es men game
In he second s age, he i ms an icipa e hese p o i s and decide simul aneously on hei
g een in es men s xi,i∈ {1,2}, which de e mine hei success in he en i onmen al
con es . As abo e, he unique Nash-equilib ium is in mixed s a egies and can be de i ed
o m he p ope y ha he mixed s a egy o Fi m jmus lea e Fi m iindi e en be ween
all i s pu e s a egies (played wi h posi i e densi y), whe e i, j ∈ {1,2}and i=j. This
implies, again, ha Fi m i’s expec ed p o i om choosing any in es men le el xi>0
(wi h posi i e densi y) equals he expec ed p o i om choosing an in es men le el o
xi= 0 and losing he con es almos su ely:
E[πi] = πw·Fj(xi) + πℓ·(1 −Fj(xi)) −cxi=πℓ
o i, j ∈ {1,2}and i=j. In combina ion wi h Lemma 3, his yields
F∗
i(xi) = cxi
πw−πℓ
=cxi
µℓ(4µw−µℓ)
(µw−µℓ)(µℓµw− 2)
as he mixed equilib ium s a egy o Fi m i∈ {1,2}. Lemma 4 summa izes he esul s.
13

Lemma 4. Assume ha he ma ke is unco e ed and he en i onmen al con es is o ga-
nized as an all-pay auc ion wi h awa d µw> µℓ. In he second-s age equilib ium, i m
i∈ {1,2}makes an expec ed g een in es men o
E[xi] = (πw−πℓ)/(2c) = 1
2c
(µw−µℓ)(µℓµw− 2)
µℓ(4µw−µℓ)
and has a winning p obabili y o αi= 1/2. Mo eo e , condi ional on he ou come o he
con es , he expec ed g een in es men o he winne and lose , espec i ely, a e
E[xw|xw> xℓ] = 2 ·(µw−µℓ)(µℓµw− 2)
3cµℓ(4µw−µℓ),(6)
E[xℓ|xℓ< xw] = (µw−µℓ)(µℓµw− 2)
3cµℓ(4µw−µℓ).(7)
5.1.3 S age 1: Se ing he en i onmen al awa d
In he i s s age, he egula o se s he le el o he en i onmen al awa d µwin o de o
maximize o al wel a e, which we compu e based on Lemma a 3 and 4:
W=pℓ·Dℓ+pw·Dw−c·(E[xℓ|xℓ< xw] + E[xw|xw> xℓ])
+Zθ
θ
( −pℓ)dθ +Z1
θ
( −pw)dθ
−δ·(Dℓ·(1 −E[xℓ|xℓ< xw]) + Dw·(1 −E[xw|xw> xℓ]))2
=µw(µ2
ℓ−µwµℓ+ 3 µℓ+ 3 2)
µℓ(4µw−µℓ)
−δ(µℓ−µw)[5µℓµw+ 2 (µℓ+µw)](µℓµw− 2)
+ 3cµℓ(4µw−µℓ)[2 µw+µℓ(3µw+ )]2·1
9c2µ4
ℓ(4µw−µℓ)4.
(8)
I he ma ke is no co e ed, inc easing p ices will no only shi su plus om con-
sume s o p oduce s, bu also educe agg ega e demand. Thus, when choosing he awa d
µw o p omo e en i onmen al in es men s, he wel a e maximizing egula o no only
aces a ade-o be ween in es men cos s on he one hand and g eene p oduc ion on
he o he . The egula o also accoun s o wo opposing e ec s ha s em om he e-
duced ma ke olume: While a lowe p oduc ion le el leads o a lowe agg ega e le el
o he en i onmen al ex e nali y, lowe ma ke co e age educes he agg ega e u ili y o
consume s.
Based on he i s -o de condi ion dW/dµw= 0, we use nume ical me hods o he
so wa e Ma hema ica o exempla ily compu e he equilib ium alue µ∗
w o he (co ne )
case o = 0,12 ixed in es men cos s c= 1, ixed s anda d quali y µℓ= 1, and di e en
alues o he s eng h o he ex e nali y δ. As Figu e 2 illus a es, he main esul s o
he co e ed ma ke model also hold o he unco e ed ma ke : I he a io c/δ is less
12No ice ha o = 0 he lowe ma ke co e age does no educe he agg ega e u ili y o consume s
because, hen, consume su plus ne o en i onmen al conce ns is ze o e en in he laissez- ai e benchma k.
He e, we show ha e en in his case whe e he en i onmen al con es does no cause addi ional ha m
o consume s due o lowe consump ion, a wel a e maximizing en i onmen al con es may s ill educe
consume su plus.
14
c=1
μl=
-0.2 0.0 0.2 0.4 0.6 0.8 1.0
δ
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
μw
*
(a)
c=1
μl=1
0.4 0.5 0.6 0.7 0.8 0.9 1.0
δ
-0.02
0.02
0.04
0.06
0.08
0.10
0.12
ΔCS =CS*-CSLF
(b)
Figu e 2: Unco e ed ma ke : (a) The op imal le el o he en i onmen al awa d as a unc ion
o ma ginal en i onmen al damage δ.(b) Di e ence in consume su plus be ween a con es -
designed (all-pay auc ion) equilib ium and a laissez- ai e equilib ium.
han a i s h eshold ( ha is, he e, δ > 9/28), he egula o implemen s he con es , c .
P oposi ion 1 and Figu e 2(a); bu as long as ha a io is no less han a second h eshold
( ha is, he e, δis no g ea e han abou 0.648), he implemen a ion o he con es is
de imen al o consume s, c . P oposi ion 2 and Figu e 2(b).
5.2 A wel a e maximizing lo e y con es
In he baseline model o Sec ion 4, he en i onmen al con es is o ganized as an all-pay
auc ion. The de e minis ic all-pay auc ion is ully disc imina o y in he sense ha he
con es an wi h he highes in es men wins o su e. I is well known ha , in symme ic
se ings like ou s, he all-pay auc ion is he con es success unc ion ha p o okes he
highes possible in es men s, which is desi able in ou con ex o an e ec i e educ ion
o he en i onmen al ex e nali y. The assump ion ha he egula o can pe ec ly obse e
i ms’ in es men s and ully disc imina e when assigning he en i onmen al awa d may,
howe e , no always be ul illed in p ac ice.
In his sec ion, we conside an en i onmen al con es o ganized as a lo e y con es .
Being based on a andom success unc ion, he lo e y con es inco po a es some noise:
A con es an ’s winning p obabili y is gi en by he a io be ween he own in es men and
he agg ega e in es men s o all con es an s. Thus, he playe wi h he highe in es men
is mo e likely o succeed bu does no win o su e. Assuming a co e ed ma ke and a
wel a e maximizing egula o , we eplica e he analysis o Sec ion 4 o his al e na i e
con es success unc ion and compa e he esul s.
5.2.1 S age 3: P ice game
In he hi d s age, i ms ace he same p icing game as desc ibed in sec ion 4.2. Lemma
1 desc ibes ma ke p ices, p o i s, and he espec i e demand le els.
5.2.2 S age 2: In es men game
In he second s age, i ms choose he amoun o g een in es men s xi. Fo i, j ∈ {1,2},
i=j, i m i’s p obabili y o winning he en i onmen al awa d is gi en by he lo e y
15
con es success unc ion13
αi(xi, xj) = 1
2i xi=xj,
xi
xi+xjo he wise.
Hence, i m i∈ {1,2},i=j, chooses xiin o de o maximize he expec ed p o i
E[πi] = pw·Dw·xi
xi+xj
+pℓ·Dℓ·1−xi
xi+xj−cxi.
We use he i s o de condi ions dE[πi]/dxi o compu e he equilib ium in es men le els,
when applying a lo e y con es , indexed L:
xL
1=xL
2=µw−µℓ
12c.(9)
5.2.3 S age 1: Se ing he en i onmen al awa d
In he i s s age, he egula o se s he awa d µwin o de o maximize o al wel a e
WL=pℓ·Dℓ+pw·Dw−c·xL
ℓ+xL
w
+Z˜
θ
0
( −pℓ)dθ +Z1
˜
θ
( −pw)dθ −δ·Dℓ(1 −xL
ℓ) + Dw(1 −xL
w)2
= −1
6(µw−µℓ)−δ12c+µℓ−µw
12c2
.
(10)
We use he i s o de condi ion dWL/dµw o compu e he op imal le el o he en i on-
men al awa d
µL
w=µℓ+12c(δ−c)
δ.(11)
I sa is ies he cons ain µL
w> µℓi and only i 0 < c/δ < 1. As o he all-pay auc ion,
i is op imal o he egula o o implemen he lo e y con es i and only i he ma ginal
in es men cos s a e su icien ly low compa ed o he s eng h o he en i onmen al ex-
e nali y. The condi ion is, howe e , somewha s ic e . Compa a i e s a ics esul s a e
analog o he case o he all-pay auc ion as well. The e o e, quali a i ely, he esul s o
P oposi ion 1 apply. Based on Lemma 1 and Equa ions (9) and (11), Table 2 summa izes
he equilib ium alues o he espec i e a iables i 0 < c/δ < 1; o he wise, he egula o
does no implemen he lo e y con es (µL
w=µℓ) and he laissez- ai e esul s apply (see
i s column o Table 1).
5.2.4 Lo e y con es s. all-pay auc ion
As a e e ence o compa ison we use he equilib ium ou comes o he wel a e maximizing
all-pay auc ion design (see second column o Table 2). We ind ha , h oughou , he
all-pay auc ion is a mo e e ec i e ins umen han he lo e y con es in he sense ha i
13Skape das (1996) p o ides an axioma ic ounda ion.
16
Table 2: Equilib ium ou comes o a wel a e maximizing lo e y con es (L) o 0 < c/δ < 1
and a wel a e maximizing all-pay auc ion con es (∗) o 0 < c/δ < 10/9.
Wel a e maximizing lo e y con es Wel a e maximizing APA
µL
w=µℓ+12c(δ−c)
δµ∗
w=µℓ+27c(10δ−9c)
50δ
pL
w=8c(δ−c)
δp∗
w=9c(10δ−9c)
25δ
pL
ℓ=4c(δ−c)
δp∗
ℓ=9c(10δ−9c)
50δ
xL
1=xL
2= 1 −c
δE[x1]∗=E[x2]∗=9
100 (10 −9c
δ)
E[xw|xw> xℓ]∗=6
5−27c
25δ
E[xℓ|xℓ< xw]∗=3
5−27c
50δ
ϵL=c
δ2ϵ∗=9c
10δ2
CSL= −20c
3+17c2
3δCS∗= −3c+189c2
100δ
PSL=14c(δ−c)
3δPS∗=3c(10δ−9c)
25δ
WL= −2c+c2
δW∗= −9c
5+81c2
100δ
leads o bo h, highe wel a e and lowe en i onmen al damage. P oposi ion 5 summa izes
he esul s.
P oposi ion 5. Compa ing he wel a e maximizing all-pay auc ion and he wel a e max-
imizing lo e y con es o 0< c/δ < 1in a co e ed ma ke , he all-pay auc ion induces
(i) highe social wel a e (W∗> WL),
(ii) lowe en i onmen al damage (ϵ∗< ϵL).
Mo eo e , i he ma ginal in es men cos s a e su icien ly low compa ed o he s eng h
o he en i onmen al ex e nali y, i.e., i 0< c/δ < 110
119 , he all-pay auc ion in ol es
(iii) a lowe en i onmen al awa d (µ∗
w< µL
w),
(i ) lowe p ices (p∗
i< pL
i),
( ) highe consume su plus (CS∗> CSL), bu lowe p oduce su plus (PS∗< PSL).
In ui i ely, as he all-pay auc ion is mo e compe i i e han he lo e y con es , he
egula o can induce he same le el o agg ega e g een in es men s as in he op imal
lo e y con es using a lowe awa d. This, in u n, esul s in a lowe deg ee o e ical
p oduc di e en ia ion and, hence, in lowe ma ke p ices, in highe consume su plus,
bu lowe p oduce su plus when applying he all-pay auc ion design. While bo h i ms
choose he same (pu e s a egy) le el o g een in es men s in he lo e y con es , he
expec ed (mixed s a egy) in es men o he winning i m is la ge han he expec ed
(mixed s a egy) in es men o he losing i m in he all-pay auc ion. Since he winne o
he con es has a highe ma ke sha e, he same agg ega e g een in es men s educe he
expec ed en i onmen al damage mo e e ec i ely and, hus, inc ease he expec ed wel a e
mo e e ec i ely i he egula o uses an all-pay auc ion ins ead o a lo e y con es . A
o io i, he supe io i y o he all-pay auc ion will hold i he espec i e awa d is chosen
op imally a he han o inducing he same le el o agg ega e g een in es men s as in he
op imal lo e y con es .14 Figu e 3 illus a es he esul s ega ding consume su plus.
14Mo e gene ally, in he class o Tullock con es s (Tullock, 1980), he all-pay auc ion cons i u es an
uppe bound o en i onmen al e ec i eness. No ice ha he s anda d Tullock con es wi h he con es
success unc ion αi(x1, ..., xn) = x
i
Pn
j=1 x
jcon e ges o an all-pay auc ion as → ∞ (Ewe ha , 2017).
17
0.0 0.2 0.4 0.6 0.8 1.0
0.0
0.2
0.4
0.6
0.8
1.0
c
δCS*>CSL
CS*<CSL
Figu e 3: Consume su plus dependen on ma ginal g een in es men cos cand ma ginal
damages δin a co e ed ma ke . In he da k g ay a ea, implemen ing he wel a e maximizing
all-pay auc ion con es yields highe consume su plus, compa ed o he lo e y con es . In he
ligh g ay a ea, implemen ing he wel a e maximizing lo e y con es yields highe consume
su plus, compa ed o he all-pay auc ion. The whi e a ea ep esen s he cons ain 0 < c/δ < 1.
6 Conclusion
Beyond well-known policy ins umen s such as g een subsidies, emission ading, o axa-
ion, his pape has s udied an en i onmen al con es , issuing an en i onmen al awa d, as
an al e na i e measu e o con ol g eenhouse gas emissions. An ad an age o an en i on-
men al con es is ha i ms ha e an incen i e o pa icipa e olun a ily. The p esence o
an awa d allows i ms o di e en ia e hei p oduc s and inc ease hei p o i s. This holds
i espec i e o whe he o no a i m ends up winning he en i onmen al awa d. Fu he -
mo e, i ms do no ha e o disclose con iden ial da a o implemen he mechanism. Only
he documen a ion o i ms’ g een in es men s is equi ed.
In pa icula , we ha e in es iga ed he impac o an en i onmen al awa d in a Be and
duopoly wi h g een consume s conside ing a h ee-s age game. Fi s , he egula o designs
he en i onmen al con es . Second, i ms choose hei g een in es men s, and he winne
o he con es is awa ded. Thi d, i ms compe e in p ices, and consump ion akes place.
We ha e illus a ed ha he awa d no only incen i izes g een in es men s and hus
educes en i onmen al ex e nali ies. As consume s pe cei e he p oduc o he awa ded
i m o be o supe io quali y, i also gi es ise o e ical p oduc di e en ia ion. This
induces ma ke powe , and hus an i-compe i i e e ec s: Ren s shi om consume s o
p oduce s, and consume su plus may dec ease, pa icula ly i ma ginal in es men cos s
in g een echnologies a e high. In sea ch o a sui able ins umen , a policy make has o
con on hese po en ial d awbacks o an en i onmen al con es wi h i s a o emen ioned
ad an ages.
Ou pape p o ides i s insigh s in o he mechanics o an en i onmen al con es . We
ha e shown ha ou main esul s a e obus o a ia ions o ma ke demand (co e ed
s. unco e ed ma ke ) and con es echnologies (all-pay auc ion s. lo e y con es ). To
gene alize he esul s e en u he , i may be wo hwhile o ex end he model o mo e
18

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s uc u es such as sequen ial decisions o addi ional pe iods. In a ela ed wo king pape ,
Heidelmeie and Schmi (2025) compa e g een in es men incen i es and wel a e e ec s
o an en i onmen al con es wi h hose o eco-labeling.
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190 Robe o Rozzi and S e anie Y. Schmi , Ve ical p oduc di e en ia ion, p ominence,
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192 Sa ah Migno , Paolo Pellizza i, and F ank Wes e ho , Fake News and Asse P ice Dy-
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202 S e anie
Y. Schmi , In es men s in en i onmen al quali y unde limi ed a en ion
203 Jan Schulz and Jan Da id Webe , Powe Laws in Socio-Economics
204 Ra ael Ko he, Connec ing he Do s: How Social Ne wo ks Shape Expec a ions Th ough
Economic Na a i es
205 Jan Schulz and Leonha d Ipsen, Poo Households and he Weigh o In la ion
206 Lisa Heidelmeie and S e anie Y. Schmi , Awa ds s. Labels: Incen i izing In es men s
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207 Lisa Heidelmeie and Ma co Sahm, En i onmen al Awa ds in a Duopoly wi h G een
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