Proportional warm-glow theory and asset pricing

Abstract

Dreyer, Sharma and Smith (2023) conjecture that investors may feel good about themselves from making socially responsible investments; they may get a “warm glow” from going green. They estimate a model of “warm glow” investment where investors derive utility from the total amount invested in green assets. In this paper we quasi-replicate their paper to estimate an alternative form of warm-glow preferences where people get utility from the share of their wealth invested in green assets. We show that the green preference of investors has become significantly larger since the financial crisis of 2007.