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ESG Performance, Managerial Compensation, and Competition in Differentiated Product Market
Ho, Shirley J.
|Issue Date:||2021-09-02 17:42:57 (UTC+8)|
This paper studies three issues of ESG and market competition strategies. First, this paper analyzes the impact of ESG and firms’ other competitive strategies (output, advertising, and R&D). Second, this paper analyzes the impact of incorporating ESG into managerial compensation. Finally, this paper analyzes the impact of the penalty schemes. The results show that: (1) The own ESG effects decrease the own price elasticity and the degree of product differentiation, but not related to market size or production efficiency. We also find that when large firms increase the ESG activities or small firms decrease ESG activities, the degree of concentration will increase. In addition, we find that the firm with larger sizes, the firm with more efficient, the firm with a lower elasticity, and the firm with a higher degree of production differentiation will engage in more ESG activities. (2) We find that the inclusion of ESG-related compensation can increase or decrease the equilibrium output, depending on whether the firm's ESG component in compensation is sufficiently higher than opponents’. (3) We find that fixed penalties will increase managers’ effort incentive on ESG activities, but the effect on equilibrium outputs will depend on the relative sizes of penalties. And, we find that the effects on outputs will decrease with the level of uncertainty in ESG performance. Moreover, we find that the equilibrium efforts and outputs are higher with the proportional penalties.
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