Greenwashing in ESG information disclosure: An intertemporal signaling game approach

Strategic consumers are increasingly willing to pay a premium for durable products with ESG attributes, leading firms to potentially engage in greenwashing by exaggerating or embellishing their actual ESG investments to capture this premium. This paper develops an intertemporal signaling game model where a firm privately knows his level of ESG investment cost and can choose between two disclosure strategies: the active disclosure strategy (AS) and the reluctant disclosure strategy (RS). Our analysis explores the impact of greenwashing on dynamic pricing, sales volume, consumer surplus and social welfare. We show that, the firm with low level of ESG investment (low-type) cannot greenwash effectively when the cost difference between low and high ESG investment levels is large, since the firm with high level of ESG investment (high-type) is more willing to reveal his type; otherwise, the low-type firm has the opportunity to greenwash because the high-type firm prefers to hide his type. Moreover, choosing AS over RS increases the firm's first-period sales but reduces his second-period sales due to the "information-inference" effect and the "price-shifting" effect. Interestingly, under certain conditions, greenwashing can actually increase consumer surplus, driven by consumers' strategic behavior. Remarkably, the government's "anti-greenwashing" requirements do not incentivize the firm to increase his ESG investment if the valuation discounts in the second-period is significant.