Consumers' Environmental Awareness and Firms' Managerial Delegation Contracts Under Emission Tax Policies

ABSTRACT This study considers consumers' environmental awareness of polluting firms' managerial delegation contracts and compares the effects of committed and time‐consistent emission tax policies. It reveals that when environmental performance (EP) incentives prevail, sales performance (SP) incentives depend on the emission tax type and competition mode, either Cournot or Bertrand competition, and that environmental awareness is crucial in determining the relative weights of EP and SP. In an endogenous choice between a government's efficient tax timing and firms' coordination of competition mode, higher environmental awareness can induce Cournot competition accompanied by time‐consistent tax, but it is suboptimal for society.