Incentivized Mergers and Cost Efficiency: Evidence from the Electricity Distribution Industry*

Abstract

We propose an endogenous merger algorithm to evaluate the impact of government‐provided incentives on consolidation patterns for services such as electricity distributors, school boards, hospitals and municipalities. The algorithm replicates the observed industry reconfiguration, with calibrated parameters used to simulate consolidation patterns that would have resulted from policy incentives. We apply the method to the case of Ontario, where transfer tax reductions have been proposed to incentivize consolidation of electricity distributors. We find that the proposed incentive would have no impact on efficiency and consolidation, and even subsidies would still leave many more electricity distributors than desired by policy makers.