Consumer Preferences and Green Transition

This paper investigates the effects of consumer preferences on the green transition. I develop a real options model where a firm, initially endowed with brown technology, faces stochastic consumers' preferences for green goods. Preferences for green goods are observable and governed by a diffusion process whose drift is unknown to the firm. Surprisingly, incomplete information does not necessarily delay the green transition relative to a complete information benchmark. I also use my model to investigate the effectiveness of different regulatory tools in the green transition. My findings reveal that regulations promoting green investment, such as subsidies or tax credits, seem more promising as they translate into a high level of carbon tax. Furthermore, I generate a set of novel predictions regarding the role of consumers in the green transition and the relative effectiveness of different regulatory tools.