I am happy to announce that the first draft of my new working paper “A Simple OLG Model for Impact Investing” with my co-authors Sijmen Duineveld and Kai Lessmann from the Potsdam Institute for Climate Impact Research has been released. This paper contributes to the CLIMVEST project (Climate Impact Investing – The contribution of sustainable investments to achieving climate targets).
This paper studies a deterministic general equilibrium overlapping generations model with two different types of investors characterized by their preferences for environmentally responsible behavior. We propose a simple preference-driven mechanism to explain the return-on-capital differential between green and brown firms and find that this differential decreases in the share of environmentally responsible investors in the economy. This effect is stronger if the emission intensity is higher. We show that implementing an optimal carbon tax that internalizes the negative effects of carbon dioxide emissions curbs the return-on-capital differential as the behavior of the two types of investors converges.