Greenwashing Under Competition

Problem definition: Growing consumer awareness of corporate social responsibility (CSR) has motivated firms to invest in CSR initiatives to gain a competitive edge. However, a phenomenon known as greenwashing has emerged, whereby firms exploit observable CSR activities and advertising solely as a marketing tactic. Methodology/results: We develop a game-theoretic model with two types of firms: a socially responsible firm that intrinsically values CSR and a profit-maximizing firm that may engage in action-based or message-based greenwashing by investing in observable CSR activities or CSR advertising, respectively. Consumers are socially minded but face limited information about the firms’ actual CSR type, inferring the type through observable CSR investment and advertising. We examine how the advertising influence and competition intensity affect equilibrium strategies and social welfare. Our findings show that when advertising influence is high, the profit-maximizing firm engages in greenwashing. When it is moderate, the socially responsible firm overinvests in CSR to deter imitation. When it is low, the two firm types naturally separate. Notably, under high transparency, stronger advertising influence can increase both overall CSR activity and social welfare. Moreover, when transparency is low, the profit-maximizing firm strongly prefers greenwashing; in such settings, if competition intensity is low, greenwashing persists, whereas if competition intensity is high, the socially responsible firm responds by overinvesting to prevent greenwashing. Managerial implications: Greenwashing produces both negative and positive outcomes. Although it erodes consumer surplus, it can spur higher CSR activity in a competitive environment, enhancing social welfare. These results suggest that governments and nongovernmental organizations should carefully design CSR transparency measures; their effect on total CSR investment and social welfare can vary depending on the levels of advertising influence and competitive intensity. Funding: This work was supported by the National Natural Science Foundation of China [Grants 72201280 and 72471167]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2025.0420 .