Leveraging the Disagreement on Climate Change: Theory and Evidence

We model a mortgage market where agents have different beliefs over a longrun climate risk. In contrast with existing two-period competitive-equilibrium models, our infinite-horizon competitive-search model predicts more pessimistic agents are more likely to make leveraged investments on properties exposed to the climate risk. They also tend to use longer maturity debt contracts, which are more exposed to the long-run risk. Employing large data on property/mortgage transactions and high resolution sea-level-rise maps, we find robust evidence for these findings. We also document how monetary and securitization policies affect mortgage climate exposure. Our results highlight the importance of heterogeneous beliefs in understanding the effects of climate change on the financial system.