Managerial Incentives and Polluting Inputs Under Imperfect Competition

This paper explores the link between upstream input pricing and downstream strategic delegation decisions. It complements earlier contributions by studying how environmental emissions and tax payments alter the incentives business owners have to divert their managers from profit maximization in favor of sales revenue generation. Two scenarios are compared depending on whether the upstream supplier precommits to a fixed input price or adopts a flexible price strategy. Corresponding Subgame-Perfect Nash-Equilibria are characterized and elements of comparative statics analysis are presented. The analysis confirms that previous results-showing that a price precommitment makes the upstream supplier better off and downstream firms worse off-carry over to situations in which production generates pollution.