ESG in Financial Markets and Corporate Practice: Teaching Why Acting Together Is Hard with Three Games on Enforcement, Verification, and Common Knowledge
Heejin Yang, Doowon RyuCorporate ESG commitments and claims can fail for the same reasons as collective action initiatives for sustainability, yet classroom games usually teach only one of them, the free-rider problem. This paper argues that collective action fails for three distinct reasons and proposes a short game for each. A cheating game, a public goods game played without and then with monitoring, teaches the enforcement gap: contributing is efficient but not individually rational unless non-contribution is detected and sanctioned. A bluffing game, in which firms claim to be green, teaches the verification gap: when claims are free, the word “green” earns no premium until verification makes false claims costly. A hats puzzle followed by a stag hunt teaches the common knowledge gap: conditional cooperation requires that everyone knows that everyone knows, so compliance must be visible. Each game is mapped to the institution that closes its gap, and each gap has a counterpart in corporate practice and financial markets, from net-zero pledges without penalties and unverified ESG disclosures to ESG ratings that coordinate investors’ beliefs. The paper provides payoff tables, equilibrium predictions, debriefing questions, and a teaching note for a 90 min session. The proposal has not yet been evaluated in a classroom.