Incentive Alignment and Investment Distance

Can increased financial intermediation create unintended welfare consequences, when investments produce externalities? This paper tests whether negative externalities matter less when investments take place faraway and whether positive externalities matter more when investments are closer to home. While ESG practices are being improved upon by corporations and increasingly priced by market participants, little is known about the investors who either bear or do not bear the negative impacts of their investments. As financial intermediation has distanced the investors from the final investment outcome, the resulting increase in financial efficiency might have created unintended consequences. To understand whether those who do not internalize the negative externalities caused by their investments will be a crucial next step for understanding the ethical financial dilemmas that have risen in recent decades.

Proposal – Document