Stranding ahoy? Heterogeneous transition beliefs and capital investment choices

Louison Cahen-Fourot, Emanuele Campiglio, Louis Daumas, Michael Gregor Miess and Andrew Yardley

Journal of Economic Behavior & Organization, 2023, vol. 216, issue C, 535-567

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: D84 E71 Q43 Q56 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:216:y:2023:i:c:p:535-567

DOI: 10.1016/j.jebo.2023.10.028

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