Externalities of Responsible Investments
97 Pages Posted: 17 Aug 2022 Last revised: 28 Sep 2023
Date Written: August 7, 2022
Abstract
We develop a model to study the efficiency of socially responsible investing (SRI) as a market-based mechanism to control firms' externalities. When responsible and profit-motivated investors interact, 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.
Keywords: Socially responsible investment, divestment, engagement, externalities, governance
JEL Classification: D62, G34, M14
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