Responsible Consumption, Demand Elasticity, and the Green Premium
66 Pages Posted: 6 Sep 2023 Last revised: 20 Feb 2024
Date Written: August 31, 2023
Abstract
We study equilibrium asset prices when consumers favor green over brown goods. We show that goods' demand elasticity crucially affects assets' riskiness. When elasticity is high, green assets are riskier than brown and vice-versa when elasticity is low. Hence, the Green-Minus-Brown stock return spread, or green premium, increases in demand elasticity. Using US data from 2012 to 2021, we estimate an annual green premium of 7.56% for high elasticity firms and -2.04% for low elasticity firms. These results suggest that responsible consumption extends beyond the product market and may unintentionally penalize some green firms by raising their cost of capital.
Keywords: Responsible consumption, Demand elasticity, Green premium, ESG
JEL Classification: G11, G12
Suggested Citation: Suggested Citation