Research

Publications

Journal of Financial and Quantitative Analysis.
Media Coverage: LSE USAPP.
Runner-up Paper at 2022 World Finance & Banking Symposium.
Presentation: CICF 2023, Texas Economic Theory Camp 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.

Journal of Economic Dynamics and Control.
Media Coverage: Duke's Law School FinReg Blog.
Presentation: 2023 FTG Summer School, 2022 Chicago Both 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

Abstract: The greenium (brown-green expected return spread) arises from the brown sector’s exposure to the risk of climate policy tightening by the Government and investors’ diversification motives. In addition, the average investor features an altruistic preference for consuming green output, making it riskier to hold green assets when green goods become scarce. This induces a relative-supply hedging premium, which masks part of the green premium. Brown firms’ option to spend on abatement technologies reduces the intensity of policy risks the brown sector suffers, thus further counteracting the green premium. Taken together, policy risks and the diversification effect are at the core of green premium generation; however, accounting for the relative-supply hedging premium and green innovations in a unified framework is crucial for understanding forces that shape the greenium.

Revise and Resubmit at Finance and Stochastics.
Abstract: Ai and Li [2015] introduced a problem at the interface of the neoclassical investment and dynamic contract theories. In particular, the authors consider the optimal design of a contract that provides efficient incentives to the management for it to implement the shareholder’s investment plan despite the former’s limited commitment. The participation constraint for this problem—which has to be satisfied at any time in an economic environment prone to productivity shocks—leads to a new class of stochastic control problems. Our objective in this paper is to address the new technical challenges arising in this class of problems and to construct the optimal policy and value function in case of a strictly convex adjustment cost function and contrast our results to those obtained by Ai and Li [2015] for the bang-bang control case.

Work In Progress

Why it Pays to Be Green

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