Insurance coverage and environmental risk in an evolutionary oligopoly

Abstract

This paper studies the evolution of an oligopoly market where two types of companies, brown and green, are present. Green firms adopt a less polluting technology that allows a reduction in emissions. We want to investigate the possibility of an environmental-friendly transition where insurance can give its support to cover the (endogenous) climate change loss. The model is composed of two parts. We analyze a two-stages game in which the companies maximize their profits by choosing output in the first stage and insurance coverage in the second one. Then we develop an evolutionary game to endogenize the selection of being brown or green, according to the expected random profits. We derive analytically the dynamic regimes may arise and we perform a sensitivity analysis at the stable inner steady state, where firms coexist, changing the main key parameters to understand which ones may be strategic for an ecological transition.