Voluntary Disclosure and Adverse Selection: Bayesian Game-Theoretical Inferences for Green Bond Labelling Regimes

14 Pages Posted: 22 Jul 2021

Date Written: July 17, 2021

Abstract

The impact finance market has sought to 'internalise externalities and adjust risk perceptions' (G20 Green Finance Study Group, 2016), demonstrating the private sector's capability in resolving the climate free-rider problem through the 'greening' of economic activities, partially bypassing corrective government intervention. As the market continues to develop, however, the voluntary disclosure regime that the market operates under threatens to enforce an adverse selection problem and contribute to a fundamental erosion of confidence in the market segment, constraining the potential of impact finance instruments to affect positive social and environmental change. I relate the work of Crawford and Sobel (1982); Milgrom (1981); Verrecchia (1983); Jung and Kwon (1988); Myers and Majluf (1984); Frantz (1997); Frantz and Instefjord (2006) to the green bond market and draw inferences to inform recommendations for policy-led solutions.

Keywords: green bond, Bayesian equilibria, voluntary disclosure, adverse selection, game theory, central bank, greening

JEL Classification: C70,G14,G18,G40,M48,Q56

Suggested Citation

Henide, Karim, Voluntary Disclosure and Adverse Selection: Bayesian Game-Theoretical Inferences for Green Bond Labelling Regimes (July 17, 2021). Available at SSRN: https://ssrn.com/abstract=3889797 or http://dx.doi.org/10.2139/ssrn.3889797

Karim Henide (Contact Author)

London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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