A new public goods’ game: how heterogeneous agents invest in the green transition

We develop a new model for green investments which blends features of the portfolio choicemodel and the non-cooperative private provision of pubic goods game. Agents differ in timepreference and in economic size. Our model shows that (a) long-term investors tend to have alarger share of their portfolio in green bonds, (b) larger agents/economies tend to invest morein climate mitigation, and (c) more heterogeneity among the types of agent (both in termsof time preference as well as economic size, looking beyond thresholds) increases aggregateclimate investments. We provide empirical evidence for the first two effects. Our model hassignificant implications for climate policy: it points to the importance of long-term investors inthe green transition and to the importance of larger groups of countries agreeing on cooperativeframeworks, for example, in the form of climate clubs, to increase overall investments in climatemitigation.