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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 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 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
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 (Scheduled), 7th Annual RCF-ECGI Corporate Finance and Governance Conference (Scheduled), 2026 Asia Meeting of the Econometric Society, East & Southeast Asia (Scheduled), Commodity and Energy Markets Association 2026 Annual Meeting, Exeter Sustainable Finance Conference 2026, 2026 International Symposium on Climate, Finance, and Sustainability, 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 estimated to be positive, yet two questions remain: what drives it, and does the higher cost of capital it imposes on brown firms spur the green innovation it is meant to encourage? This paper develops a continuous-time general-equilibrium model of a brown and a green sector that addresses both. The greenium decomposes into three interacting components: a policy component, from the brown sector’s exposure to climate-policy tightening; a diversification component, because the dominant brown sector co-moves most with aggregate wealth and is the poorer hedge for the market portfolio; and a hedging component that runs the other way, as a household with a taste for green consumption fears green scarcity and accepts a lower return on green equity, masking part of the spread. Policy risk and diversification are the primary drivers, and the greenium deepens as climate risk intensifies. Brown firms can innovate by mitigating—lowering the frequency of policy shocks—or transitioning—converting brown capital into green—yet both are misaligned with the premium they face. This yields a novel, risk-based explanation for the recent decline in green innovation. Calibrated, the model produces a greenium of roughly 60 basis points at a brown share near three-quarters, rising to 75–85 as the brown sector dominates, in line with recent estimates.
Managerial Limited Commitment: A New Class of Stochastic Control Problems
with Alain Bensoussan, Alejandro Rivera, and Benoit Chevalier-Roignant
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.
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