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Abstract

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 crowding out effect due to reputation. We find green reputation leads to overprotection and brown firms buy reputation if consumers have strong preference on green products. When consumers care less about firms’ reputation, firms do not have any incentive to buy reputation.

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