Emission Tax and Environmental Corporate Social Responsibility Under Relative Profit Performance Competition: Committed Versus Time‐Consistent Tax Policies

This paper considers a green managerial delegation contract where the managers face a relative profit performance competition and examines the impact of emission taxes on a firm's environmental and social performances. When the owners can determine profit‐oriented environmental corporate social responsibility (ECSR), we compare committed tax and time‐consistent tax cases and show that owners adopt ECSR only if the competition managers face is severe enough in both cases. The resulting industry profits are non‐monotone in the severity of competition only when firms adopt ECSR under a time‐consistent tax. Our findings suggest that the government should increase its credibility in the tax commitment when competition is intense, while it should coordinate with regulated firms regarding their optimal regulatory timing when competition is less severe and product substitutability is high.