A model of strategic sustainable investment

Tiziano De Angelis, Caio C\'esar Graciani Rodrigues and Peter Tankov

Papers from arXiv.org

Abstract: We study a problem of optimal irreversible investment and emission reduction formulated as a nonzero-sum dynamic game between an investor with environmental preferences and a firm. The game is set in continuous time on an infinite-time horizon. The firm generates profits with a stochastic dynamics and may spend part of its revenues towards emission reduction (e.g., renovating the infrastructure). The firm's objective is to maximize the discounted expectation of a function of its profits. The investor participates in the profits and may decide to invest to support the firm's production capacity. The investor uses a profit function which accounts for both financial and environmental factors. Nash equilibria of the game are obtained via a system of variational inequalities. We formulate a general verification theorem for this system in a diffusive setup and construct an explicit solution in the zero-noise limit. Our explicit results and numerical approximations show that both the investor's and the firm's optimal actions are triggered by moving boundaries that increase with the total amount of emission abatement.

Date: 2024-12
New Economics Papers: this item is included in nep-ene, nep-env and nep-gth
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2412.00986 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2412.00986

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().