A strategic analysis of incorporating corporate environmental responsibility into managerial incentive design: A differential game approach

Abstract As corporations’ environmental impacts come under greater scrutiny by global financial, regulatory and societal stakeholders, management scholars have increasingly focused on the role corporate governance plays in undertaking corporate environmental responsibility (CER). This paper combines managerial incentives and CER in a dynamic environment to formulate a differential game model of managerial incentive design in a duopolistic market, investigating whether companies with maximum interests are motivated to provide their professional managers with incentives related to CER and the impact of such incentives on corporate profitability, social welfare and emissions reduction. The results demonstrate that (1) employing professional managers will increase the emissions reduction efforts of firms and giving incentives to professional managers will further increase the emissions reduction level of firms. (2) When a firm employs a professional manager and pays a fixed salary, profit is slightly lower than when a manager is not employed but, if a professional manager is given CER-related incentives, profit will be greatly increased. (3) As long as professional managers are employed, social welfare will increase regardless of whether professional managers are given incentivized pay. Total social welfare is the lowest in a duopolistic market when neither firm employs a professional manager, and social welfare is the highest when both employ a professional manager and give CER-related incentives. (4) The emissions reduction of a firm increases with an increase in the income distribution coefficient π1.