Competition for limited critical resources and the adoption of environmentally sustainable strategies

Abstract

We develop a game-theoretical methodology that incorporates competition for limited resources to explicitly model a firm`s valuation and, hence, its decision whether to adopt environmentally sustainable strategies (e.g., recycling programs to replace limited natural resources, alternative technologies). Even if switching to environmentally sustainable alternatives proves too expensive for individual firms, or resource costs are expected to remain low, we show that competition for resources would still push firms to incur switching costs as they become more environmentally sustainable. Using a sample of firm-level data from the KLD database which includes firms` sustainability policies, we find empirical support that competition for resources is positively correlated with a firm`s adoption of environmental strategies. Tests that use the Chinese government`s 2010 rare-earth supply suspension as an exogenous shock to competition for limited resources suggest a causal interpretation for our finding.