Financing green entrepreneurs under limited commitment

Alain Bensoussan, Benoit Chevalier-Roignant, Nam Nguyen and Alejandro Rivera

Journal of Economic Dynamics and Control, 2024, vol. 168, issue C

Abstract: Risk-averse entrepreneurs interact 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 (respectively, financier) limited commitment makes it more (less) costly for governments to encourage green technology adoption. 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 impairing 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.

Keywords: Sustainable finance; Limited commitment; Optimal taxation (search for similar items in EconPapers)
JEL-codes: G30 G38 H23 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:168:y:2024:i:c:s0165188924001222

DOI: 10.1016/j.jedc.2024.104930

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