A Tale of Two Networks: Common Ownership and Product Market Rivalry
We study the welfare implications of the rise of common ownership in the United States from 1994 to 2018. We build a general equilibrium model with a hedonic demand system in which firms compete in a network game of oligopoly. Firms are connected through two large networks: the first reflects ownership overlap, the second product market rivalry. In our model, common ownership of competing firms induces unilateral incentives to soften competition. The magnitude of the common ownership effect depends on how much the two networks overlap. We estimate our model for the universe of U.S. public corporations using a combination of firm financials, investor holdings, and text-based product similarity data. We perform counterfactual calculations to evaluate how the efficiency and the distributional impact of common ownership have evolved over time. According to our baseline estimates the welfare cost of common ownership, measured as the ratio of deadweight loss to total surplus, has increased nearly tenfold (from 0.3% to over 4%) between 1994 and 2018. Under alternative assumptions about governance, the deadweight loss ranges between 1.9% and 4.4% of total surplus in 2018. The rise of common ownership has also resulted in a significant reallocation of surplus from consumers to producers.
We thank John Asker, José Azar, Matt Backus, Paul Beaumont, Pietro Bonaldi, Lorenzo Caliendo, Jan De Loecker, Jan Eeckhout, Matt Elliott, Murray Frank, Francesco Franzoni, Laurent Fresard, Erik Gilje, Paul Goldsmith-Pinkham, Ben Golub, Todd Gormley, Jerry Hoberg, Hugo Hopenhayn, Pete Kyle, Song Ma, Gordon Phillips, Martin Schmalz, Fiona Scott Morton, Jesse Shapiro, Mike Sinkinson, Russ Wermers, Yufeng Wu, Leeat Yariv, Luigi Zingales, and seminar participants at APIOC, Berlin, Berkeley, the Cambridge Network Economics Conference, CEPR FirmOrgDyn, Cornell, Georgetown, HBS, HKUST, Michigan, NBER Organizational Economics, NBER Megafirms, NYU Stern, Rice, SAET, UCLA, UMD, and Yale for helpful comments. Aslihan Asil and Ian Veidenheimer provided outstanding research assistance. We gratefully acknowledge research funding from the Washington Center for Equitable Growth. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.