Game Theory Model Reveals How Government Oversight Can Make or Break Corporate Green Innovation

A new mathematical study of China’s push toward carbon peaking and carbon neutrality finds that the fate of corporate green technology innovation hinges on a delicate balance of government subsidies, monitoring intensity, and penalties—and that too much oversight can backfire, causing enterprises to abandon green research and development altogether. The research, published in Frontiers in Physics, uses evolutionary game theory to model how three players—government, enterprises, and consumers—interact and adapt their strategies over time as China pursues its “Dual Carbon” goals announced in 2020.

The study, conducted by Chaohua Yan and Liu Yang of Henan University of Animal Husbandry and Economy and Peng Liang of Zhengzhou Business University, builds a tripartite evolutionary game model in which each party is treated as boundedly rational: none of the players has perfect information or unlimited computational power, so each adjusts its strategy by learning and imitating rather than by instantly computing the optimal move. The government chooses between active and passive regulation, enterprises choose between implementing and not implementing green technology innovation, and consumers choose between purchasing green and traditional products. The probabilities of each strategy are functions of time, and the researchers derived replicator dynamic equations that describe how those probabilities shift as players accumulate experience.

Green technology innovation, or GTI, is central to the Dual Carbon agenda because enterprises are the key microeconomic agents in decarbonization. Yet the authors argue that GTI carries dual externalities—its benefits spill over beyond the innovating firm—so market forces alone cannot achieve optimal resource allocation. Enterprises face long development cycles, high risks, financing difficulties, and insufficient capital investment, which erode their intrinsic motivation to innovate. Consumers, meanwhile, often have limited awareness of green products’ performance and environmental benefits, weakening the demand signal that would otherwise reward innovators. The government’s regulatory role, the study notes, has at times been ill-defined, with insufficient oversight of the green product market leading to market failures such as subsidy fraud and greenwashing.

To analyze the system, the researchers followed a method proposed by Friedman, performing a local stability analysis of the model’s Jacobian matrix. Setting the replicator dynamics to zero yields eight pure-strategy equilibrium points, but only those whose Jacobian eigenvalues are all negative satisfy Lyapunov’s stability criterion and qualify as evolutionarily stable strategies. Because all model parameters are positive, four of the eight equilibrium points fail this test outright. The remaining stable outcomes map onto three distinct phases of corporate green innovation, which the authors link to green economy life cycle theory: an initiation stage, a development stage, and a maturation stage, each characterized by a different stable configuration of strategies among the three players.

In the initiation stage, the government recognizes the urgency of reconciling economic growth with environmental sustainability and adopts active regulation, introducing research subsidies, tax benefits, and administrative penalties. But the system faces steep obstacles: an underdeveloped legal and policy framework, immature technologies, and high incremental innovation costs. Small and medium-sized enterprises, lacking innovation infrastructure and funding, adopt a wait-and-see attitude. Green products suffer from incomplete functionality and low market share, and consumers struggle to distinguish them from conventional alternatives, so purchasing intentions remain weak. In the development stage, penalties on non-innovating enterprises are still relatively weak, so most firms stick with traditional technology while only a few leaders innovate out of corporate social responsibility. As penalties rise, enterprises find the fines increasingly difficult to bear and shift toward GTI; as subsidies grow, research costs decline and incentives strengthen. Consumers in this stage buy green products only when functionality improves enough to offer a superior user experience.

The maturation stage depicts a market in which policies, regulations, and industry standards are well established and green development becomes mainstream. Enterprises that innovate enhance their reputation and capture economic rents from both government and consumers, shifting from reluctant to proactive innovation. Intense competition, however, makes the industry prone to ruinous price wars, which the authors say requires stronger government oversight of product safety and quality, refined industry standards, and regulated market order. Widespread government publicity campaigns raise consumer awareness, and once the additional benefit of buying green exceeds the additional cost, consumer demand shifts decisively toward green products.

To move beyond the analytical results, the team ran numerical simulations in MATLAB, targeting the ideal evolutionarily stable state in which all three parties adopt their pro-green strategies. Initial strategy probabilities for all players were set to 0.5, and the researchers varied key parameters one at a time while holding the rest constant. Varying the subsidy coefficient across low, medium, and high values showed that the intensity of government subsidies is positively correlated with enterprises’ motivation to pursue GTI: at low subsidy levels, weaker firms cannot bear the substantial costs of innovation and abandon it, while well-resourced industry leaders continue innovating on expectations of a future green transformation. At high subsidy levels, innovation costs fall, enthusiasm for research strengthens, and the system converges faster to the stable state. Consumer behavior evolves in tandem—when subsidies are high, purchase subsidies and tax incentives expand, green product supply becomes more abundant, and consumers shift toward green purchases. Interestingly, higher subsidies slow the government’s own convergence toward active regulation, because as enterprises innovate the government can delegate some regulatory functions to market forces.

The simulations on monitoring intensity produced the study’s most striking result: an inverted relationship in which moderate oversight helps but excessive oversight harms. Under low and medium monitoring, subsidy fraud and greenwashing persist, ruinous competition prevails, and the government evolves toward active regulation to restore market order. Under an appropriate level of monitoring, the market environment improves, consumer demand rises, and enterprises evolve toward GTI. But when monitoring becomes excessively intense, enterprises choose to abandon green innovation altogether—dampened enthusiasm combines with aggravated fiscal pressure on the government, which ultimately causes it to abandon monitoring. Consumers respond in kind: excessive monitoring exposes subsidy fraud incidents, leading them to question the authenticity of green products and stop buying. The authors conclude that moderate government monitoring promotes corporate GTI and fosters a healthy, orderly market.

Penalty intensity showed a different pattern. Under different penalty levels the government consistently evolves toward active regulation, with convergence speed rising modestly as penalties increase. For enterprises, low penalties leave the high incremental cost of innovation far exceeding the penalty cost, so profit-maximizing firms continue using traditional technology, though some leaders still innovate for reputational reasons. As penalties intensify, the burden becomes excessive, restricting polluting behavior and fundamentally altering strategic choices, with evolutionary speed positively correlated with penalty intensity. Consumers follow the enterprises: higher penalties push firms to provide greater added value, strengthening consumers’ green awareness and accelerating their shift to green products. Notably, the authors report that changes in penalty intensity have a negligible effect on consumers’ own evolution but a significant effect on enterprises, and that the government’s evolutionary speed exceeds that of the other two players—implying regulators must formulate appropriate penalty standards in advance based on market conditions.

Based on these findings, the study proposes a set of policy directions: establishing a robust penalty mechanism that raises the cost of environmental violations and adopts credit-rating-based evaluation with dynamically calibrated reward-and-penalty measures; strengthening supervision of subsidy fraud and greenwashing through ex ante, interim, and ex post oversight; consolidating the government’s leading role by subsidizing both innovating enterprises and green-purchasing consumers; and optimizing collaborative innovation through industry–university–research alliances and knowledge sharing among large firms, small and medium-sized enterprises, and research institutions. The authors frame the work as grounded in stakeholder theory and bounded rationality, and they caution that the model’s conclusions rest on its parameter assumptions and simulation settings rather than on direct empirical measurement of real firms. As a theoretical contribution, the tripartite model extends earlier two-player government–enterprise analyses by explicitly co-evolving consumer strategy, offering a quantitative lens on how regulation, incentives, and market demand jointly shape the path to China’s carbon targets.

Subject of Research: Evolutionary game modeling of government, enterprise, and consumer strategies in corporate green technology innovation under China's dual carbon goals

Article Title: Evolutionary game analysis of corporate green technology innovation strategies under the “dual carbon” goals

Article References: Yan, C., Liang, P., & Yang, L. (2026). Evolutionary game analysis of corporate green technology innovation strategies under the “dual carbon” goals. Frontiers in Physics, 14, Article 1952164. https://doi.org/10.3389/fphy.2026.1952164

Image Credits: AI Generated

DOI: 10.3389/fphy.2026.1952164

Keywords: green technology innovation, dual carbon goals, evolutionary game theory, government regulation, subsidies, penalties, consumer behavior, carbon neutrality, carbon peaking, China, tripartite game model, replicator dynamics