Policy Opacity

William Cassidy, Finance PhD student

This project studies the impact of political constraints on climate policies and asset prices. I develop a model where governments implement policies that can lower emissions, but at the cost of lower output. In general, governments and voters disagree over the optimal trade-off between output and emissions. Voters discipline the policy choice of the government through elections. In equilibrium, voter demand for relatively green or brown policies will affect the actions of the government. Voter preferences are directly linked to the expected cashflows and valuations of firms. Further, when voters and households disagree over the optimal policy, governments misreport the policy they implement. Misreporting relaxes electoral discipline but concurrently increases investor uncertainty over future cashflows. Political uncertainty endogenously arises because of strategic interaction between voters and the government through elections.