Green Technology Investment and Production Decisions Considering Stochastic Demand and Firms' Decision Preferences Under Cap‐and‐Trade Regulation

ABSTRACT This paper investigates how finite rational firms optimally respond to market potential under cap‐and‐trade regulation, considering stochastic demand. Using the mean–variance model framework, we develop an optimization model for green technology investment and production by finite rational firms with different decision‐making preferences. The main results indicate: (1) Under stable demand, firms investing in green technology gain more profits and consumer surplus, however, the effectiveness of carbon emission reduction depends on the market potential size. (2) Under stochastic demand, optimal decisions resulting from firms' varying decision preferences systematically deviate from those of risk‐neutral firms and often demonstrate firms' risk‐averse tendencies that lean towards conservatism. As external factors change, there can even be a reversal in technology investment with an increase in demand uncertainty that amplifies this systematic deviation. (3) Taking firms with different decision‐making preferences as the starting point, this study further analyses the distortion effect of the firm's risk attitude on the optimal technology investment and production decisions, enriching the related research on the joint decision‐making risk model of clean production. And it is more pertinent to the complex situation firms face in the real situation with decision‐making. (4) This study provides a theoretical basis and practical reference for the finite rational firms facing green technology investment choices. Considering the risk‐averse characteristics of firms, this study suggests that the government should establish a risk‐sharing mechanism to weaken the deviation of stochastic demand from the optimal decision‐making of firms or implement certain subsidy policies to protect the profit level of firms.