Policy Uncertainty Reduces Green Investment

53 Pages Posted: 19 Jun 2023

See all articles by Mengyu Wang

Mengyu Wang

Tsinghua University - PBC School of Finance

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Hong Zhang

Singapore Management University - Lee Kong Chian School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 9, 2023

Abstract

Government subsidies are often used to stimulate environment-friendly investment. We find that Chinese firms reduce green investment as the uncertainty of subsidies rises. This effect is identified from weather-driven fluctuations in air pollution that lead to fluctuations in subsidy allocations: Firms in cities where weather-driven subsidy uncertainty is high engage in less green R&D investment, patent applications, and research staff. Industries that are heavy emitters and those focused on environmental technologies are more affected. The results suggest that policy uncertainty may originate not only from political and macroeconomic shocks but from behavioral mechanisms that link policy to salient recent conditions.

Keywords: Economic Policy Uncertainty, R&D, Environment, Irreversible Investment

JEL Classification: G31, L51, O32, O38, O13, Q53, Q54, Q56, Q58, E22, E61, H25

Suggested Citation

Wang, Mengyu and Wurgler, Jeffrey A. and Zhang, Hong, Policy Uncertainty Reduces Green Investment (June 9, 2023). PBCSF-NIFR Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4474726 or http://dx.doi.org/10.2139/ssrn.4474726

Mengyu Wang

Tsinghua University - PBC School of Finance

Jeffrey A. Wurgler (Contact Author)

NYU Stern School of Business ( email )

Stern School of Business
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National Bureau of Economic Research (NBER)

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Hong Zhang

Singapore Management University - Lee Kong Chian School of Business ( email )

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Singapore

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