Abstract

KAYALICA, M. Ozgur  and  ESPINOSA RAMIREZ, Rafael Salvador. Political contributions, subsidy and mergers. EconoQuantum [online]. 2012, vol.9, n.2, pp.61-80. ISSN 2007-9869.

We examine, in a oligopolistic partial equilibrium model, the effects of mergers and internal lobbies in shaping national subsidy policies. Domestic and foreign firms compete in the market for a homogeneous good in a host country, then the optimal output of the firms can be affected ambiguously by the government subsidy policy in the host country. Domestic firms offer political contributions to the government, that are tied to the government's policy decision. The government sets the optimal policy maximizing a weighted sum of total contributions and aggregate social welfare taking into account merger of domestic firms as a competitive response.

Keywords : Foreign Direct Investment; Mergers; Lobby.