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Cross‐ownership and environmental R&D risk choices in a differentiated duopoly

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  • Dongdong Li
  • Xiaochan Yan
  • Yue Zhang

Abstract

This paper develops a differentiated duopoly model to investigate the optimal environmental R&D (ER&D) risk choices of firms with cross‐ownership under an emission tax. The results show that when firms hold shares in each other, cross‐ownership incentivizes firms to undertake greater ER&D risks. The private incentive for ER&D risk is lower than the social incentive when the emission tax rate is low relative to the marginal environmental damage. However, a higher share of cross‐ownership can bring the private optimum closer to the social optimum under certain conditions. We also find that under unilateral shareholding, a firm partially owned by its rival assumes higher ER&D risk than the firm owning its shares, but both take on less risk than under cross‐ownership. Finally, we show that ER&D risk is higher under Bertrand competition than under Cournot competition.

Suggested Citation

  • Dongdong Li & Xiaochan Yan & Yue Zhang, 2025. "Cross‐ownership and environmental R&D risk choices in a differentiated duopoly," International Journal of Economic Theory, The International Society for Economic Theory, vol. 21(4), pages 473-493, December.
    • Handle: RePEc:bla:ijethy:v:21:y:2025:i:4:p:473-493
    DOI: 10.1111/ijet.70005
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