The Effect of Environmental Consciousness

This paper investigates the effect of environmental consciousness on firms ’ adoption decisions toward a pollution abatement equipment. The impact of environmental awareness takes a form of cost reduction, which turns the interaction among firms into a coordination game with multiple equilibria: either both firms adopt or no one adopts. This is contrary to the various facts of partially coordination on pollution control. Moreover, two prominent criteria for equilibrium selection suggest that the equilib-rium with no adoption should be chosen. We provide a solution by proving the existence of collusion outcomes in subgames following asymmetric adop-tion decisions. Such a subgame outcome, in turn, supports the asymmetric adoptions (partially coordination) as part of a subgame perfect equilibrium. JEL classification: Q28, H21, C61, C79