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Cross-country Emission Tax Effect of Mergers

Author

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  • Mahelet G. Fikru
  • Luis Gautier

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.

Suggested Citation

  • Mahelet G. Fikru & Luis Gautier, 2023. "Cross-country Emission Tax Effect of Mergers," Arthaniti: Journal of Economic Theory and Practice, , vol. 22(1), pages 113-128, June.
    • Handle: RePEc:sae:artjou:v:22:y:2023:i:1:p:113-128
    DOI: 10.1177/0976747920958094
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