Corporate environmental claims: a game theory model with empirical results

Abstract

Purpose – This paper aims to examines whether firms’ eco-friendly advertising claims are supported by environmentally friendly behavior. Design/methodology/approach – The paper develops a game theory model to determine the circumstances under which firms’ environmental claims will be supported by the adoption of best environmental practice. Least squares regression is used to test major theoretical implications. Findings – The theoretical model suggests that the credence good nature of un-monitored environmental claims prohibits consumer validation; firms have an incentive to advertise green but no incentive to adopt best environmental practice. Third-party monitoring transforms the game, making eco-friendly outcomes possible. Empirical models based on North American data suggest that firm profit rates are related to verifiable environmental claims and to easily accessible external ratings of environmental performance. Originality/value – Unlike previous game theoretical models for similar goods, the eco-friendly outcome does not require a repeated game. The importance of the single period game is that continued patronage is not required for the firm to produce goods containing the desired attributes.