Stranding Ahoy? Heterogeneous Transition Beliefs and Capital Investment Choices
56 Pages Posted: 23 Dec 2022 Last revised: 7 Sep 2023
Date Written: December 1st, 2022
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.
Keywords: Asset stranding; Beliefs; Heterogeneous expectations; Investment choices; Low- carbon transition; Short-termism
JEL Classification: D84, E71, Q43, Q56
Suggested Citation: Suggested Citation