Modelling mergers among polluting firms when environmental policy is endogenous

This article builds a theoretical model to study merger decisions among polluting firms. We adopt the idea of endogenous policies where governments adjust optimal policy after the occurrence of mergers. We find that the adjustment in policy provides additional incentives to merge. Given a specific model of merger process with endogenous policies, we find that the optimal merger is the one among highly polluting firms. Therefore, in the post-merger market the merged entity is dirtier compared to stand-alone firms.