A Signaling Game for Green Bonds

Fabian Alex

No 242, Working Papers from Bavarian Graduate Program in Economics (BGPE)

Abstract: We build a signaling game model of a firm’s decision to acquire a costly green label which enables it to emit a green bond. A greenium may compensate it for the incurred cost. That cost is higher for non-green firms. With an investor that prefers a clean environment and dislikes being fooled into believing in a fabricated green label, there are equilibria featuring green bonds by either both firm types, only the green firm or neither. Allowing side payments undermines stability of all equilibria where a green label is acquired. A neutral rather than a green investor considerably decreases the number of conceivable equilibria, as does uncertainty about the investor type. The equilibria of the baseline model are preserved if we allow two investors, a green and a neutral one, to decide on their respective purchase of the bond sequentially. Lastly, if investors hold all market power, no green labels will be observed at all.

Keywords: Environment; Environmental Economics; Green Economics; Game Theoretic; Game Theory; Two Player; Strategic Game; Signaling Game (search for similar items in EconPapers)
JEL-codes: C72 D21 Q5 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2025-08
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