Strategic Decision-Making in Green Financing: A Game-Theoretic Model and Monte Carlo Simulation of Firm, Investor and Bank Interaction

Abstract

Green bonds and green bank loans coexist as instruments for financing the low-carbon transition, yet the strategic mechanism through which issuers select between them remains weakly formalized. This paper models green debt instrument choice as a three-stage extensive-form game with perfect information in which a firm first selects a financing route, a bank then chooses credit enhancement in the bond branch or loan terms in the loan branch, and investors decide whether to subscribe. Because the bank’s credit enhancement enters the investors’ participation condition, the three players are genuinely strategically interdependent, and because the bond branch carries only a small standby cost rather than the full loan cost, the regulatory regime affects the choice of instrument and not merely the level of financing cost. The subgame-perfect equilibrium is characterized analytically by backward induction and is then implemented numerically over the eight admissible states of demand, issuer credibility and regulatory regime through a Monte Carlo experiment of 200,000 parameter draws. The share of simulated parameter configurations yielding a green bond equilibrium falls from 93.4% under high demand and strong credibility to 14.2% when both deteriorate; the regulatory regime flips the equilibrium instrument in 19.4% of draws, against 0% in the degenerate special case without the enhancement channel. A variance-based global sensitivity analysis (Sobol and Morris) and an incomplete-information extension with a noisy credibility signal complete the analysis. All reported quantities are numerical solutions of the model under an illustrative calibration, not empirical estimates.