Environmental R&D Risk Choice With Partial Cross‐Ownership in a Vertically Related Market

ABSTRACT This paper examines the impact of partial cross‐ownership on firms’ environmental R&D (ER&D) risk‐taking decisions in a vertically related market. The results show that forward cross‐ownership incentivizes downstream firms to engage in higher‐risk ER&D activities, while backward cross‐ownership tends to reduce such risk‐taking behavior. Additionally, we find that higher levels of cross‐ownership generally lead downstream firms to opt for riskier projects. Finally, we show that, regardless of the cross‐ownership structure, the private incentives of downstream firms for ER&D risk are higher than the social incentives when the emission tax rate is high relative to the marginal environmental damage. These findings remain robust in extensions concerning uniform pricing and Bertrand competition.