Economics for a sustainable world.

A small parasite making big waves? Industry consolidation under spatial-dynamic externalities

Félix M. Lavoie, Linda Nøstbakken & Joshua K. Abbott

This paper investigates how spatial externalities can drive industrial consolidation. Theory suggests that intra-industry externalities may be internalized through mergers and acquisitions. To prevent damages to their production, firms can take control of neighboring assets and operate them as a single entity. We test empirically if a consolidation wave in Norwegian salmon aquaculture was partly motivated by the risk of parasitic contamination. Our unique plant-level dataset includes detailed information on production, environmental quality, and financial indicators of all Norwegian firms. Our strategy use the asymmetry of spatial cross-contamination among plants. We disentangle between usual mergers' rationales such as increasing economies of scale of buying plants in proximity, and the internalization of lice externality through oceanic currents. We find that an increase by a standard deviation in the risk of contamination increases the probability of merger or acquisition.

Free Riding in Norwegian Aquaculture: An empirical investigation of the Exploitation Hypothesis

Félix M. Lavoie & Linda Nøstbakken

Free riding is a well-known challenge to the voluntary provision of public good. When agents' size are heterogeneous, the Exploitation Hypothesis predicts that larger actors will contribute disproportionately more than smaller ones to the public good. This well-established theory is described in a variety of context but the empirical literature is scarce on actual measurements of the prevalence and the amplitude of this phenomenon. This paper investigates empirically the Exploitation Hypothesis using a unique plant-level dataset of Norwegian salmon marine aquaculture. The parasitic sea lice is considered by the industry as the main obstacle for growth. Firms contribute to the common good by making costly efforts in lice mitigation, and all facilities benefits from parasite-free waters. Theory suggests that salmon producers chooses its own efforts level according to his own cost-benefit ratio without considering his contribution to social welfare. To inquire about the risk of free riding in lice mitigation, we first derive under which conditions free riding could arise in a fjord system using a strategic game approach. Second, we test if size, defined as the total production of the firm within a spatially delimited zone, influences the level of delousing efforts. We estimate an average 2% elasticity in the probability of delicing when the firms' micro-regional share of production increases. This confirms that firms with less value at risk will delice less. To mitigate the risk of free riding, this results shows the importance of considering the spatial allocation of property rights in the design of environmental policies.

Consequences of industry consolidation for the control of spatial externalities: The case of Norwegian salmon aquaculture

Félix M. Lavoie, Joshua K. Abbott, & Linda Nøstbakken

Transmissible parasites and diseases constitute major challenges in intensive aquaculture. In the Norwegian salmon farming industry, costs associated with treatment of sea lice are surging, and reached 5bn NOK or 10\% of the industry’s total export value in 2015. The Norwegian salmon farming industry experiences a high degree of ownership fragmentation compared to other countries. The large number of players at the national and regional level can create a challenge for coordination in sea lice mitigation, leading to a “Tragedy of the Commons.” This paper conducts an event study to examine the impact of mergers and acquisitions on environmental outcomes. We inquire about firms' behaviors in the prevention and treatment of parasites before and after a merger. The change in ownership may modify the choice of treatment type, the frequencies and other preventive procedures. The event study design allows us to examine incremental changes that may occur over time. The literature suggest a lag between the time of an acquisition and the effects following the introduction of new management practices. We also examine how the increasing degree of consolidation at the regional level influences firms' behaviors and therefore environmental quality. We use a unique farm-level dataset on Norwegian salmon aquaculture, that provides high-frequency data for each farm locations on production, treatments, and environmental quality. We analyze parasitic levels before and after the merger controlling for location and regional characteristics, in-site production of biomass, seasonality, and long-term trends. Preliminary results suggest treatment behaviors differ according to firm characteristics such as size and spatial connectivity of farms. Regional concentration induces firms to alter their behavior to partially ‘internalize’ the parasite externality. Our findings highlight interactions between industrial and environmental policies in the context of aquaculture – interactions that will become even more important as regulators wrestle with both consolidation and spatial intensification in aquaculture systems.