The role of dynamic strategies in firms’ sustainability decisions: Estimation and Identification of Corporate Sustainability Interactions

We model the behaviour of firms in the market for sustainability (we will refer to market for sustainability as the competitive environment that can award or penalise firms according to whether they take sustainable actions) as a dynamic oligopolistic competition and estimate the model structural parameters using data from KLD Sustainability Database. The estimation results are expected to reveal that firms sustainable investment decisions and sunk costs are closely related to entering the market and further this is closely related to the level of competition in the market. This competition effect is well-documented for many other product/service markets in the literature, especially when the oligopolistic market structure allows firms to behave strategically. However, sustainability (CSR) is a different product/service: It is expected to be resembling some characteristics of product/service markets yet can be quite different in others. Modelling the sustainability as a market still have benefits that outweigh this overlooking. In a dynamic setting rather than static (Soytas et al., 2020), the spill-over effects which prove to be a weak factor in static strategic environment is likely to be extremely important. To the extent that cost of sustainability decreases depending on benefits of spill-over, the equilibrium can support relatively large number of sustainable firms. From a policy making perspective, this can be thought as a more desirable outcome. Presumably coupled with an existing regulatory framework for minimum sustainable investments (including the CSR, but not limited to that), everything else constant, creating incentives for more firms to enter this sustainability market will increase the social welfare. However, this hypothesis, though follows logically can only be made sure with an empirical strategy to estimate the model. The static sustainability model is estimated in Soytas et al, 2020 where the strategic interactions proved to be important as expected. Also again as expected, the spill-overs effects were found relatively weak. This later phenomenon can be due to the models static environment since firms competing for one period are likely to overlook the entry cost which becomes important in a dynamic setting. However, this additional benefit of recovering entry costs comes with a computational burden though. Estimation of dynamic oligopolistic games is not a straightforward estimation/research. The project team researchers on the other hand accumulated experience on the topic from their previous research on sustainability, estimation of game theoretical models and empirical industrial organization research. Also, a Ph.D. student from Yale University Economics program is a part of the research team where her expertise and fresh knowledge on the topic is expected to contribute to the projects progress.