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Impact Through Catalytic Finance

Author

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  • Hoffmann, Florian
  • Vladimirov, Vladimir

Abstract

Impact investments that require industry-wide change often stall because firms wait for peers to move first, creating a coordination trap. We develop a theory showing a built-in conflict that aggravates this trap: insuring firms against cash-flow risk unlocks investment but exacerbates agency problems. To mitigate this tension, impact investors can target a critical mass of firms with tailored financing contracts, catalyzing competitive financing for others. Unlike uniform taxes or subsidies, optimal impact financing is firm-specific, and its cost critically depends on which firms investors target. Subsidized impact financing is best directed to smaller, less efficient, high-opportunity-cost firms, while the most promising firms are best left to conventional investors.

Suggested Citation

  • Hoffmann, Florian & Vladimirov, Vladimir, 2025. "Impact Through Catalytic Finance," CEPR Discussion Papers 20861, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20861
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    File URL: https://cepr.org/publications/DP20861
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    Keywords

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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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