Responsible Consumption, Demand Elasticity, and the Green Premium

66 Pages Posted: 6 Sep 2023 Last revised: 20 Feb 2024

See all articles by Xuhui Chen

Xuhui Chen

University of British Columbia (UBC) - Sauder School of Business

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business

Ali Lazrak

University of British Columbia (UBC) Sauder School of Business

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

Chen, Xuhui and Garlappi, Lorenzo and Lazrak, Ali, Responsible Consumption, Demand Elasticity, and the Green Premium (August 31, 2023). Available at SSRN: https://ssrn.com/abstract=4557543 or http://dx.doi.org/10.2139/ssrn.4557543

Xuhui Chen

University of British Columbia (UBC) - Sauder School of Business ( email )

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Lorenzo Garlappi (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

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Vancouver, BC V6T 1Z2
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Ali Lazrak

University of British Columbia (UBC) Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822 9481 (Phone)
604-822 4695 (Fax)

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