The main purpose of this paper is to study the impact of traditional and emergent environmental regulations on firms’ strategies and outcomes. The former corresponds to, e.g., emissions taxing, and the latter to emissions reporting. To do so, we consider a differential game between two polluting firms. The market potential of each firm varies with its goodwill, whose evolution depends on its advertising effort and on its emissions, as well as those of its competitor. We characterize the open-loop Nash equilibrium and contrast the results obtained under different regulatory regimes (laisser-faire, traditional regulation, emergent regulation and dual regulation). We also carry out a sensitivity analysis to assess the impact of some key model parameters on strategies, steady-state goodwill stocks and payoffs.
Published May 2007 , 25 pages