Responsible Investment and Responsible Consumption

Should households focus on responsible investment (SRI) or responsible consumption (SRC) to mitigate externalities? Using a general equilibrium model linking product and capital markets, we show that neither strategy is efficient on its own—each shifts prices and triggers offsetting market responses. Combining SRI and SRC neutralizes these effects and maximizes impact. This complementarity holds across diverse settings, even when SRI alone would have negligible impact. The effectiveness of green finance, therefore, critically depends on households acting as both investors and consumers.

This paper was accepted by Bo Becker, finance.

Funding: This work was supported by Germany’s Excellence Strategy [Grant EXC 2126/1-39083886], Deutsche Forschungsgemeinschaft [Grant CRC TR224 project C03], and the Portuguese Foundation of Science and Technology [Grant PTDC/EGE-ECO/6041/2020].