Leveraging the Disagreement on Climate Change: Theory and Evidence

Laura Bakkensen, Toàn Phan and Tsz-Nga Wong

Journal of Political Economy, 2025, vol. 133, issue 10, 3132 - 3166

Abstract: We develop a credit search model with maturity choice where agents disagree on when a long-run disaster will damage collateral assets. It predicts that disaster-pessimistic agents are more likely to leverage risky asset purchases and prefer debt contracts with longer maturities. Intuitively, pessimists value the default option of debt contracts as implicit disaster insurance, whose coverage increases with maturity implicitly and costs less to optimistic lenders. Using high-resolution sea level rise projections and comprehensive propriety data on coastal real estate and mortgages, we find robust evidence of these predictions. The findings provide relevant policy implications on insurance mandates, securitization, disaster assistance, and financial stability.

Date: 2025
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