Managerial firms’ profitability, unions, and environmental taxes

Abstract

This article examines how determining an optimal environmental tax in a Cournot duopoly with unionized labour markets and managerial firms departing from the strict profit‐maximization. It is shown that firm‐specific monopoly unions that set wages (1) reduce both the environmental tax and environmental damage and (2) counterintuitively, increase firms’ profitability when the abatement technology is not too “efficient”, and the public evaluation of environmental quality is sufficiently high. Within this framework, the work also develops the endogenous game played by firms that must choose between sales delegation (SD) and profit‐maximization. Results show that the SD contract always emerges as the unique, deadlock sub‐game perfect Nash equilibrium, thereby solving the (prisoner's) dilemma emerging in the related existing literature assuming a competitive labour market.