A Behavioral Theory of Managerial Brownshifting

Abstract

While several firms frame sustainability concerns as organizational priorities, corporate action often appears misaligned with these stated preferences. We develop a model that can help explain this disconnect by incorporating a novel behavioral dimension into an otherwise standard principal-agent framework. Specifically, we assume economic actors experience elation from the success of "green" projects and disappointment from their failure; in contrast, these emotional components are absent for "neutral" projects. Our main result is that combining these preferences with agency frictions can induce brownshifting, with the agent selecting a relatively less green project than the principal's ideal. This result follows from the agent's desire to minimize subjective disappointment risk, which is achieved by choosing neutral projects. We also show that the principal can sometimes overcome brownshifting by offering a particularly high-powered compensation structure. Such an incentive scheme induces a high probability of success, making subjective disappointment risk less problematic for the agent.

Keywords: green investing, socially responsible investing, ESG, CSR, sustainability, behavioral economics, behavioral finance, agency theory

JEL Classification: D21, D86, D90, G30, G40, J30, L20, Q56