What does the Candy Merchant’s hat do

Throw enough candies (1630) on the ground and the guy (._.) will dig a hole (because he gets annoyed by your candy wasting). He falls into a room that contains something.

a chocolate bar

Around 2000 Candies (1770), he digs into another room. In this room, there are giant candies. He stays in the room and keeps eating them.

He doesn't do anything else after that, just eating those giant candies.

From the Candy Box 2 Wiki: Easter Eggs

One Easter Egg in the game is that when candy count reaches 42, The Player ("\o/") appears beside the number for a brief period of time. This is a reference to the Hitchhiker's Guide to the Galaxy, where 42 is the answer to life, the universe and everything.

When you get 1337 candies, the counter says "You have leet candies" in place of the count of candies.