Low-carbon consumption with government subsidy under asymmetric carbon emission information

Abstract The government subsidy for low-carbon consumption can stimulate demands and thus help increase enterprises' profits on sales. Unfortunately, not all manufacturers report their carbon emission reduction truthfully to the government. In the presence of information asymmetry, the manufacturer who produces low-carbon products has an incentive to get a higher subsidy, thereby dishonestly signaling a higher carbon reduction level to the government. This paper analytically investigates the impacts of government subsidy on participants' performances under asymmetric carbon reduction information. A classical signaling game arises between the manufacturer and government and at equilibrium. We show that the manufacturer with high emission reduction level distorts the price upwards in order to separate from the manufacturer with a low reduction level. From the comprehensive analysis, a few important findings are obtained. Firstly, this paper shows that the subsidy can benefit both the government and manufacturer when consumers are moderately sensitive to subsidy policy under complete information. Secondly, as a result of information asymmetry, the government is willing to subsidize only when consumers' sensitivity to government subsidy is relatively low or sufficiently high within a certain range. Interestingly, it is further found that if subsidy policy is more effective in stimulating demand, the subsidy can encourage the manufacturer to share information with the government in order to avoid the losses caused by the upward price distortion under asymmetric information. Consequently, they reach a consensus on both government subsidy and manufacturer information sharing only when consumers are rather sensitive to subsidies.