Work in Progress:

Political Uncertainty and Green Investment

This paper examines the impact of political uncertainty on green investment using a tractable model in which private agents invest in green technology before a government with unobserved environmental preferences sets a carbon tax. I show that the conventional wisdom—that uncertainty depresses irreversible investment—is not universal in this context. The direction of the investment response hinges on a single sufficient statistic: the curvature of the marginal value of individual investment function with respect to the government’s environmental concern parameter. Under quasi linear utility, I demonstrate that when green goods exhibit rapidly diminishing marginal utility, uncertainty discourages investment, confirming standard results. However, when marginal utility diminishes slowly—plausible in sectors where green and brown goods are close substitutes or where green technologies exhibit network effects—uncertainty paradoxically stimulates investment.

Environmental Policies, Business Cycles and Heterogeneous Agents