Affiliation:
1. Department of Economics, Missouri University of Science and Technology, Rolla, MO, USA.
2. Department of Social Sciences, University of Texas at Tyler, 3900 University Blvd., Tyler, TX, USA.
Abstract
Recent studies show that mergers among polluting firms could affect the regulatory landscape of the industry and trigger a policy change. Using a two-country model, this study examines the effect of a merger size, as measured by the number of merging firms, on the optimal emission tax of another country. We show that, if pollution damages are not too large, a decline in the size of a merger reduces production and profits in that country, which affords a larger tax in the other country due to smaller profit-shifting concerns. On the other hand, if pollution damages are extremely large, a reduction in the size of a merger in one country reduces production in that country, but it also reduces production and emissions in the other country. Thus, the latter can induce a smaller emission tax. The change in the emission tax in both scenarios is consistent with cooperative outcomes.
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