Publication Date: January 2022
The paper develops a modeling framework to study how sustainability interventions impact consumer adoption of durable goods innovation, ﬁrm proﬁt and environmental outcomes in equilibrium. Our two period model with forward looking consumers and a monopoly ﬁrm introducing an innovation in the second period accommodates three key features: (1) it builds on the psychology literature linking reactive and anticipatory guilt to consumers’ environmental sensitivity on initial purchase and upgrade decisions; (2) it disentangles environmental harm over the product life into that arising from product use and dumping at replacement; and (3) it clariﬁes how a taxonomy of innovations (function, fashion and use-eﬀiciency) diﬀer in how they provide value and cause environmental harm during use and dumping. Given how guilt impacts environmental sensitivity, the model allows for owners upgrading a product to be more environmentally sensitive than ﬁrst time buyers; this makes dumping harm and in-use harm from products not fungible. We ﬁnd that with fashion and function innovations, increasing consumer sensitivity to environmental harm can surprisingly result in increased environmental harm. Further, when consumers are very sensitive to environmental harm, ﬁrms will not inform (pre-announce to) consumers about the impending arrival of use-eﬀiciency innovation; to minimize environmental harm, a sustainability advocate needs to inform consumers. Thus, contrary to conventional wisdom, consumer environmental sensitivity does not always substitute for the role of sustainability advocates. Our results clarify how to design win-win policies for ﬁrms and the environment; and when advocates have complementary/adversarial roles relative to ﬁrms to achieve sustainability goals.
Keywords: Durable goods, Planned Obsolescence, Sustainability, Innovation, Environmental Costs