Is the public detection of managers’ emission-related actions desirable?

We consider the contracting problem between a firm and a manager. The manager provides productive efforts to increase the firm’s financial performance and to reduce its carbon emissions. The outcome of these efforts depends on the manager’s ‘green’ ability. The manager is interested in the public perception of his green ability, which affects his future employment opportunities in the managerial job market. We study how the public detection of the manager’s emission-related decisions affects optimal contract design. Our results show that a higher detection probability leads the firm to implement stronger explicit incentives for reducing carbon emissions and increasing financial performance. Public scrutiny regarding managerial actions is desirable under two conditions. First, the probability of detecting greenwashing must be higher than the probability of verifying abatement actions. Second, both detection probabilities should not be excessively high.