Incentives for Green Technology Adoption and Compliance Under Risk Aversion and Technological Uncertainty

Abstract We study firms’ incentives to adopt environmentally friendly technologies in response to emission taxes, focusing on contexts characterized by imperfect compliance and risk aversion. Previous research has analyzed technology adoption incentives and compliance issues under the assumption of risk neutrality. However, the decision to exceed regulatory limits involves risks, as polluting agents may be subject to penalties with some probability. Additionally, there may be uncertainty regarding the impact of green technology adoption on firms’ abatement costs. Therefore, risk preferences may play an important role and should be taken into account. In a baseline model with certainty about future abatement costs, we find that adoption decisions are independent of risk preferences, even when the enforcement policy is so weak that it induces imperfect compliance. In contrast, under uncertainty about future abatement costs, adoption incentives decrease with both risk aversion and weak enforcement, particularly when enforcement relies more on monitoring through higher inspection probabilities rather than deterrence through higher sanctions.