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Publications
Incentivizing Investors for a Greener Economy
with Alejandro Rivera and Harold Zhang
Journal of Financial and Quantitative Analysis.
Runner-up Paper at the 2022 World Finance & Banking Symposium.
Presentation: Texas Economic Theory Camp 2023; CICF 2023; 2023 MFA Conference; Wharton 5th Conference on Law and Macroeconomics; Eastern Finance Association 2023 Annual Meeting; 2022 World Finance & Banking Symposium; 62nd Annual SWFA Conference; Asian FA 2022; AFES 2022.
Abstract: We propose the use of investment income taxes to incentivize investors to reallocate capital to the eco-friendly green sector away from the non-eco-friendly brown sector to reduce the climate change disaster which obliterates a fraction of capital in the economy. Compared with a Carbon tax on firms, investment income tax directly affects investors’ net returns and their capital allocation decision. Climate change disaster follows a Poisson process with intensity increasing in the fraction of capital allocated to the brown sector. The laissez-faire equilibrium is not Pareto efficient and brown (green) firms over-invest (under-invest) relative to the social optimum. We show that investment income tax can deliver the socially optimal allocation as effectively as the carbon tax, thus offer an additional policy tool to achieve a greener economy and reduce the climate change disaster risk.
Financing Green Entrepreneurs under Limited Commitment
with Alain Bensoussan, Alejandro Rivera, and Benoit Chevalier-Roignant
Journal of Economic Dynamics and Control.
Presentation: 2023 FTG Summer School; 2022 Chicago Booth Rising Scholars Conference; 2023 MFA Conference; 62nd Annual SWFA Conference; 2022 Midwest Macro Meeting; VSBF 2022.
Abstract: Risk-averse entrepreneurs contract with financiers to fund their projects. Projects can be operated under green or dirty technologies. We explore the role of limited commitment in determining the adoption of green technologies when governments enact carbon taxes and/or directed investment subsidies. We show that entrepreneurial (resp., financier) limited commitment makes it more (resp., less) costly for governments to encourage green technology adoptions. Because green technologies are still at an early stage, the cash flows they generate are back-loaded. Entrepreneurial limited commitment forces consumption to increase over time thereby undermining risk-sharing and making dirty technologies more attractive. By contrast, under financier limited commitment, the possibility that front-loaded dirty technologies become obsolete forces consumption to decrease over time thereby undermining risk-sharing and making green technologies more attractive. We also show that carbon taxes (directed technology subsidies) are more cost-effective when entrepreneurs (financiers) display limited commitment.
Working Papers
What drives the Greenium, and does it align with green innovations? (Job Market Paper)
Best Paper Award at the Commodity and Energy Markets Association 2026 Annual Meeting.
Presentation: CEPR Climate Change and the Environment Symposium 2026; 7th Annual RCF-ECGI Corporate Finance and Governance Conference; Commodity and Energy Markets Association 2026 Annual Meeting; 17th Annual Financial Markets and Liquidity Conference (Accepted); 2026 Conference on “CSR, the Economy and Financial Markets” (Scheduled); 2026 Sustainable Financial Innovation Centre Annual Conference (Scheduled); 2026 Asia Meeting of the Econometric Society/ East & Southeast Asia; Exeter Sustainable Finance Conference 2026; 2026 International Symposium on Climate, Finance, and Sustainability; Emlyon QUANT seminar (Scheduled); 2026 European Meeting of the Econometric Society (Accepted); ARCS 18th Annual Research Conference (Accepted); 7th Canadian Sustainable Finance Network Conference - Young Scholar Session (Accepted); 2026 FMA European Conference (Accepted).
Abstract: The greenium—the expected-return spread between brown and green equity—is robustly positive. However, not only is its source multifaceted, but it is also unclear whether the higher cost of capital imposed on brown firms induces the green innovations that the greenium is intended to encourage. This paper develops a general-equilibrium model of a brown and a green sector and takes it to firm-level data. The greenium decomposes into three components: policy, from the brown sector’s exposure to climate-policy tightening; diversification, because the dominant brown sector co-moves most with aggregate wealth; and hedging, which runs the other way: a rising brown share raises the marginal value of wealth, and brown equity is the better hedge against it. Brown firms can respond to the cost-of-capital pressure by developing two types of green innovations: mitigating, which lowers the frequency of policy shocks, and transitioning, which converts brown capital into green. Both margins are misaligned with the greenium components that drive them, for different reasons. Mitigation switches off precisely where the policy premium is largest, because a policy event in that state is such a shock to aggregate consumption that the benefit to brown firms of reducing their exposure no longer covers its cost. Transition, which chases the valuation gap that widens in tandem with the greenium, is instead capped by the thinning green knowledge base as the brown sector grows. This yields a novel, risk-based explanation for the decline in green innovation after the Paris Agreement.
Dynamic Programming Approach to Limited Commitment
with Alain Bensoussan, Alejandro Rivera, and Benoit Chevalier-Roignant
Abstract: Inspired by Ai and Li’s (2015) model, we study a problem in which shareholders decide on an investment plan and on a dynamic contract that pays a manager in charge of this plan and accounts for this manager’s limited commitment. We model a larger class of convex adjustment costs and determine the optimal compensation plan. This problem is reducible to a continuous control problem that must be solved in a subset of the state space. However, the Hamilton-Jacobi-Bellman (HJB) equation is highly nonlinear and difficult to solve. We solve it explicitly, construct the optimal control policy, and derive a verification theorem. The optimal strategy is a continuous control that forces the state variable to remain within a subset of the state space. Compared to Ai and Li’s (2015) model, we allow for (i) differential beliefs of the shareholder and manager with respect to the decay rate of capital and (ii) the possibility for the manager to identify and implement a set of operational improvement measures.
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