Stranding ahoy? Heterogeneous transition beliefs and capital investment choices

• Published in: Journal of Economic Behavior & Organization
• Main Authors: Cahen-Fourot, Louison, Campiglio, Emanuele, Daumas, Louis, Miess, Michael, Yardley, Andrew
• Other Authors: KAUST - King Abdullah University of Science and Technology, Kingdom of Saudi Arabia, Center for Desert Agriculture, Biological and Environmental Science and Engineering (BESE) Division, Roskilde University, Denmark, WU Institute for Ecological Economics, Austria, University of Bologna, Italy, RFF-CMCC European Institute on Economics and the Environment, Italy, LSE Grantham Research Institute on Climate Change and the Environment, United Kingdom, Centre International de Recherche en Environnement et Développement, France, Federal Environment Agency Austria, Austria, Institute for Advanced Studies, Austria, Offshore Renewable Energy Catapult, United Kingdom
• Format: Article in Journal/Newspaper
• Language: unknown
• Published: Elsevier BV 2023
• Subjects: Terranova
• Online Access: http://hdl.handle.net/10754/695660; https://doi.org/10.1016/j.jebo.2023.10.028

Individuals have heterogeneous beliefs regarding the future speed and shape of the low-carbon transition. In this paper, we study to what extent opinion diversity matters for aggregate capital investment decisions. We develop a model where firms formulate heterogeneous expectations around a dominant narrative, or ‘market norm’, with their dispersion increasing over a finite planning horizon. Our analytical and numerical results suggest that belief heterogeneity can significantly affect the share of low-carbon investments, with the strength of its effects non-linearly correlated to market norms. We show that investment behaviour tends to be more sensitive to shocks to short-term, rather than long-term, belief heterogeneity, highlighting the importance of setting credible short-term targets. Finally, we find beliefs to interact strongly and in non-trivial ways with measures of short-termism, with increasing agents' farsightedness not necessarily leading to less carbon-intensive investments under high heterogeneity. The replication package for the paper is available at https://github.com/SMOOTH-ERC/stranding_ahoy. We would like to thank Giorgos Galanis, Francesco Lamperti, Hubert Massoni, Esther Marie Shears, Alessandro Spiganti, Marko Stojanovic and Roberta Terranova, as well as participants to the 2021 EAERE and the 2022 ESEE conferences. The research leading to these results has received funding from the European Research Council (ERC) under the European Union's Horizon 2020 Research and Innovation Programme (Grant agreement No 853050 - SMOOTH). EC, LCF and MM also gratefully acknowledge the Oesterreichische Nationalbank (Jubiläumsfonds projects 17641 and 18651).