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.

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demand schedule equilibrium

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Externalities of Responsible Investments