Escaping green prison through evolutionary games for firms

• We apply evolutionary game theory to analyze firm behavior in environmental sustainability. • We develop a dynamic coordination model with taxes, subsidies, and market share impacts. • We identify optimal fiscal policies to incentivize firm sustainability strategies and cooperation. • We address the “green prison” dilemma, enabling firms to adopt sustainability strategies through government incentives. • We provide insights for balancing fiscal efficiency with sustainability policy outcomes. This article presents a model of iterated dynamics that examines firms’ economic behavior in the context of environmental sustainability initiatives within a competitive game theory framework, which is optionally incentivized by government actions. Beginning with a review of literature on evolutionary game theory and sustainability, the paper explores behavioral dynamics of firms engaged in environmental sustainability efforts, frame within the Prisoner's Dilemma. The analysis highlights the importance of optimal government incentives in promoting environmental sustainability practices. The study derives an evolutionary stable strategy (ESS) for firms engaged in environmental sustainability policies, within a competitive 2 × 2 matrix environment, considering a finite evolutionary horizon.