Abstract

Technological innovations make possible a continuous improvement of the energy efficiency of industrial systems. The optimization of production processes in combination with the acquisition of innovative energy efficiency solutions enable better energy management and improved energy performance. These improvements are deemed to be profitable since they strengthen the competitiveness of the firm while enabling the achievement of social and environmental responsibility objectives such as reducing pollutant emissions. Seen from this perspective, firms should seize every opportunity to improve their energy efficiency. In actual practice, however, even investments whose profitability is indisputable, which involve low up-front outlays and produce quick returns may fail to materialize. An abundant literature has been devoted to the explanation of this apparent paradox. A non-exhaustive list of suggested explanations includes: artificially low energy prices, systematically underestimated implementation costs, information deficits, uncertainty and irreversibility of investment, market failures and cognitive biases. This paper suggests a new explanation that rests upon the strategic value of credible commitment (Schelling, 1960). Following the strategic delegation literature, we consider a two-stage sequential game in which profit-maximizing owners have the possibility to delegate production and investment decisions to a manager. In this context, profit-maximizing owners may design managerial incentive contracts so as to induce their managers to pursue objectives that differ from pure profit maximization. We prove that equilibrium incentive contracts may require that managers ignore (all or part of) energy costs in their production and investment decisions.

Practical information