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A Signaling Game for Green Bonds

Author

Listed:
  • Fabian Alex

Abstract

We build a signaling game model of a firm’s decision to acquire a costly green label which enables it to emit a green bond. A greenium may compensate it for the incurred cost. That cost is higher for non-green firms. With an investor that prefers a clean environment and dislikes being fooled into believing in a fabricated green label, there are equilibria featuring green bonds by either both firm types, only the green firm or neither. Allowing side payments undermines stability of all equilibria where a green label is acquired. A neutral rather than a green investor considerably decreases the number of conceivable equilibria, as does uncertainty about the investor type. The equilibria of the baseline model are preserved if we allow two investors, a green and a neutral one, to decide on their respective purchase of the bond sequentially. Lastly, if investors hold all market power, no green labels will be observed at all.

Suggested Citation

  • Fabian Alex, 2025. "A Signaling Game for Green Bonds," Working Papers 242, Bavarian Graduate Program in Economics (BGPE).
    • Handle: RePEc:bav:wpaper:242_alex.rdf
    as

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    File URL: https://www.bgpe.de/files/2025/08/DP242_final.pdf
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    References listed on IDEAS

    as
    1. Krahnen Jan & Rocholl Jörg & Thum Marcel, 2023. "A Primer on Green Finance: From Wishful Thinking to Marginal Impact," Review of Economics, De Gruyter, vol. 74(1), pages 1-19, April.
    2. Arnold, Lutz G., 2023. "On the neutrality of socially responsible investing," Theoretical Economics, Econometric Society, vol. 18(1), January.
    3. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    4. Neagu, Florian & Tatarici, Luminița & Dragu, Florin & Stamate, Amalia, 2024. "Are green loans less risky? Micro-evidence from a European Emerging Economy," Journal of Financial Stability, Elsevier, vol. 70(C).
    Full references (including those not matched with items on IDEAS)

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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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