Optimal growth under socially responsible investment: a dynamic theoretical model of the trade-off between financial gains and emotional rewards

Orlando Gomes

doi:10.1186/s40991-020-00049-z

Abstract

Socially responsible investment (SRI) evolved, along the last two decades, from an almost unexplored topic in science to a recurrent theme of research and debate in Economics and Finance. The growing interest on the theme has two fundamental causes. On one hand, empirical evidence unveils a change of behavior of investors, who typically no longer restrict their decision-making to a strict financial analysis; ethical, social, environmental, and political concerns are also on the forefront of investors’ assessments. On the other hand, the economic science is witnessing a paradigm shift characterized by a progressive departure from the orthodox rational deliberation framework and in the direction of the introduction of behavioral elements. In this study, an intertemporal model is proposed to serve as a benchmark for the evaluation of the implications of social and environmental awareness upon investors’ decisions and investment performance. The model is a simple optimal control framework that highlights the trade-off between financial returns and the satisfaction emanating from investing in firms or projects guided by ethical values and by good governance principles. Better financial outcomes may come with a social damage that the representative agent in the model will include, with a negative sign, in her utility function. Long-term steady-state results and transitional dynamics are duly evaluated for neoclassical and endogenous growth versions of the model.

Highlights

Along the first two decades of the new millennium, socially responsible investment (SRI) evolved from a marginal and almost unnoticed topic of research in Economics and Finance to a fundamental and unavoidable theme of investigation and debate across the scientific community
Concerning the second point above, one should emphasize that approaching SRI from a scientific point of view is part of a wider movement regarding the surge of behavioral science and of its applications to Economics and Finance2
A positive trace and a negative determinant imply that one and only one of the eigenvalues of matrix J is a negative value, meaning that the two-dimensional system under scrutiny is saddlepath stable, i.e., there is one stable dimension. This is the common result in two-dimensional optimal growth models; given the existence of a state variable and of a control variable, the convergence to the steady-state is guaranteed by the possibility of adjustment of the initial value of the control variable to the stable trajectory, which will be followed as the endogenous variables converge to the already characterized long-term equilibrium locus

Summary

Introduction

Along the first two decades of the new millennium, socially responsible investment (SRI) evolved from a marginal and almost unnoticed topic of research in Economics and Finance to a fundamental and unavoidable theme of investigation and debate across the scientific community. . If condition φ < 1/2 is not satisfied, a radical investor choice will take place: the agent will invariably select an investment project that causes no social damage, this generates the lowest possible productivity and return.

Results

Conclusion