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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.