Abstract Elementary portfolio theory implies that environmentalists optimally hold more shares of polluting firms than non-environmentalists, and that polluting firms attract more investment capital than otherwise identical non-polluting firms through a hedging channel. Pigouvian taxation can reverse the aggregate investment results, but environmentalists still overweight polluters. We introduce countervailing motives for environmentalists to underweight polluters, comparing the implications when environmentalists coordinate to internalize pollution, or have nonpecuniary disutility from holding polluter stock. With nonpecuniary disutility, introducing a green derivative may dramatically alter who invests most in polluters, but has no impact on aggregate pollution.

Abstract We model, in a market-based democracy, different constituencies that disagree regarding the likelihood of economic disasters. Costly public policy initiatives to reduce or eliminate disasters are assessed relative to private alternatives presented by financial markets. Demand for such public policies falls as much as 40% with disagreement, and crowding out by private insurance drives most of the reduction. As support for disaster-reducing policy jumps in periods of disasters, costly policies may be adopted only after disasters occur. In some scenarios constituencies may even demand policies oriented at increasing disaster risk if these policies introduce speculative opportunities. Received September 25, 2017; Editorial decision September 3, 2018 by Editor: Thierry Foucault

When investors disagree, speculation between them alters equilibrium prices in financial markets. Because managers maximize firm value given financial market prices, disagreement alters firms' value-maximizing investment policies. Disagreement therefore impacts aggregate investment, consumption, and output. In a production economy with recursive preferences and disasters, we demonstrate that static disagreement among investors generates dynamic aggregate investment that is positively correlated with capital shocks, leading to stochastic volatility in aggregate consumption, investment, and equity returns. The direction of these effects is consistent with business cycle facts, and with several features of the 2008 financial crisis.