Investing in the green transition and competition from laggards

We study heterogeneous firms’ decision-making for investment into greening their production process. Empirically, we find that an increase in labour productivity by 1% is associated with a probability increase of 3-4% of engaging in greening investment. Thus more productive and profitable firms invest more in greening. We incorporate this stylized fact into a heterogeneous firm model where a firm’s decision to engage in greening investment depends positively on idiosyncratic firm productivity. We show that the decision also depends negatively on the degree of competition in the market and positively on the probability of policymakers mandating a green production process in the future. All three decision margins are rationalised in a parsimonious small model. Comparing stationary equilibria in the full model under perfect competition, we verify that a higher probability of a green policy mandate increases the share of firms engaging in greening investment and that competition from non-investors decreases the share of firms engaging in greening investment

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