Externalities of Responsible Investments

Alessio Piccolo, Michele Bisceglia, Jan Schneemeier , - Aug 01, 2023

Working Paper No.  00113-01

We develop a model to study the efficiency of socially responsible investments (SRI) as a market-based mechanism to control firms' externalities. When responsible investors interact with profit-motivated investors, the former tend to concentrate on a subset of firms in the economy, while excluding others. This concentration of responsible capital can mitigate free-riding and coordination issues in the adoption of green technologies, but it can also create product market power and crowd out the green investments of excluded firms. If the crowding-out dominates, firms' aggregate green investments and welfare are higher without SRI. In equilibrium, responsible capital concentrates the most when concentration is the least desirable.

Download Paper

demand schedule equilibrium

Previous Versions

Externalities of Responsible Investments