Financing Green Entrepreneurs Under Limited Commitment

31 Pages Posted: 25 Jul 2022 Last revised: 17 Jan 2023

See all articles by Alain Bensoussan

Alain Bensoussan

University of Texas at Dallas - Naveen Jindal School of Management

Benoit Chevalier-Roignant

EM Lyon (Ecole de Management de Lyon) - Emlyon Business School

Nam Nguyen

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Alejandro Rivera

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Date Written: July 15, 2022

Abstract

Risk-averse entrepreneurs contract with financiers to fund their projects. Projects can be operated under green or dirty technologies. We explore the role of limited commitment in determining the adoption of green technologies when governments enact carbon taxes and/or directed investment subsidies. We show that entrepreneurial (resp., financier) limited commitment makes it more (resp., less) costly for governments to encourage green technology adoptions. Because green technologies are still at an early stage, the cash flows they generate are back-loaded. Entrepreneurial limited commitment forces consumption to increase over time thereby undermining risk-sharing and making dirty technologies more attractive. By contrast, under financier limited commitment, the possibility that front-loaded dirty technologies become obsolete forces consumption to decrease over time thereby undermining risk-sharing and making green technologies more attractive. We also show that carbon taxes (directed technology subsidies) are more cost-effective when entrepreneurs (financiers) display limited commitment.

Keywords: Sustainable Finance, Financial Frictions, Limited Commitment, Optimal Taxation.

JEL Classification: G30, G38, H23.

Suggested Citation

Bensoussan, Alain and Chevalier-Roignant, Benoit and Nguyen, Nam and Rivera, Alejandro, Financing Green Entrepreneurs Under Limited Commitment (July 15, 2022). Available at SSRN: https://ssrn.com/abstract=4163753 or http://dx.doi.org/10.2139/ssrn.4163753

Alain Bensoussan

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 West Campbell Rd
SM 30
Richardson, TX 75080-3021
United States
9728836117 (Phone)

HOME PAGE: http://www.utdallas.edu/~axb046100/

Benoit Chevalier-Roignant

EM Lyon (Ecole de Management de Lyon) - Emlyon Business School ( email )

23 Avenue Guy de Collongue
Écully, 69130
France

Nam Nguyen

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

Alejandro Rivera (Contact Author)

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

HOME PAGE: http://jindal.utdallas.edu/faculty/alejandro-rivera

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