Common Ownership: Back to Basics

February 11, 2019

Do diversified investment vehicles―especially index funds―diminish competitive pressures in concentrated industries? There is an active (and contentious) debate among researchers, policymakers and practitioners about the costs and benefits of such “common ownership.”

In addition to a rapidly growing number of industry-level studies—looking at airlines (here and here), banking (here and here) and ready-to-eat cereals (Backus, Conlon and Sinkinson, forthcoming), or at broad groups of industries—other researchers have sought to link common ownership to macroeconomic phenomena, like the weakness of post-crisis investment. And, in response to anti-competitive claims, legal scholars propose using antitrust law to limit the holdings of institutional investors in oligopolistic industries. Against this background, competition authorities in Europe and the United States are taking the debate seriously (see, for example, the FTC hearing held in December at the NYU School of Law).

Our own view is that the discussion remains at a very early stage, and that it is likely to take years to resolve whether CO, especially through index-tracking mutual and exchange-traded funds, meets the cost-benefit test (for a skeptical view of CO, see here). Importantly, even if CO does reduce competitive pressures, we currently know far too little to about the scale or scope to identify remedies that would be most effective and least disruptive. Furthermore, should the case for broad-based anti-competitive effects become compelling, any response will need to consider the welfare trade-off between the very large consumer benefits arising from broad index funds and the consumer costs associated with a loss of competition in selected oligopolistic industries.

Against this background, we welcome two new papers (here and here) by Backus, Conlon and Sinkinson (BCS) that review the literature, provide new data to characterize the evolving pattern of share ownership, and suggest a back-to-basics approach for testing the CO hypothesis in specific industries. We hope that their work will spur a wave of CO research that will help us weigh the increasingly animated claims and counter-claims. In the remainder of this post, we highlight a few of the lessons from this recent research….

Antitrust and the Financial Sector

January 21, 2019

Antitrust has again become a hot topic in U.S. policy discourse. There are lots of contributing reasons: Online firms have grown large and ever more important in many individuals’ lives. Media references to “Big Oil”, “Big Pharma”, “Big Tech”, etc., have become more common. The Obama Council of Economic Advisers issued a 2016 report that highlighted rising seller concentration—and related concerns about rising market power—in many sectors of the U.S. economy. These concerns have been echoed by The Economist and by a number of academic and “think tank” studies. There have been efforts to link this increasing size and concentration to wage stagnation and worsening income distribution.

The term “monopoly” is heard far more frequently today than was true even a decade ago.

Antitrust is one of the major policy tools in the United States—along with direct regulation—designed to address monopoly and more generally the exercise of market power. For the financial sector, regulation of various kinds generally overshadows antitrust. But even for the financial sector, antitrust plays an important role: indeed, in June 2018, the U.S. Supreme Court decided an important antitrust case that involved American Express’s relationship with the merchants that accept its payment card.

So, let’s first review some basics about antitrust. We’ll next describe the recent trends in company sizes and seller concentration. And we will then move on to the relevance of antitrust for the financial sector….

Mutual Funds, "Common Ownership" and Ownership Concentration

August 27, 2018

Guest post by Richard Berner, Executive-in-Residence (Center for Global Economy and Business) and Adjunct Professor, NYU Stern School of Business

America faces two interrelated long-term challenges: rising longevity and inadequate retirement saving. The combination of declining private, defined-benefit pension plans and concerns about the viability of federal entitlements has intensified these challenges. While the economic recovery has raised confidence about retirement resources at the margin (see here), workers and retirees remain concerned about how they will meet future basic expenses, medical needs or the cost of long-term care.

Those developments mean that achieving saving goals increasingly must rely on individuals’ thrift and intelligent, efficient investing. Tax-advantaged vehicles that encourage saving (like 401k and IRA accounts), and efficient investment vehicles like mutual funds that follow market-wide stock price indexes are cornerstones of that system.

Yet, some scholars of industrial organization claim that collective investment vehicles―mutual funds, exchange-traded funds (ETFs), and the like―involve “common ownership” that results in softened competition by the firms included in their portfolios (see here, here and here). And, key antitrust enforcers, like the European Competition Commissioner, are looking carefully at this issue. In this post, I argue that the evidence for a causal link between the rise of collective investment vehicles and diminished competition is weak, and far from sufficient to justify interventions that would diminish the attractiveness of these saving mechanisms….

Labor's Declining Share: A Primer

June 05, 2017

Economists build models around simple facts to isolate what drives behavior. In macroeconomics, perhaps the most famous of these facts has been the observed stability of the shares of income paid to labor and to capital. At least since Kaldor wrote 60 years ago, this pattern of income distribution has been at the top of the list of regularities to be explained by theories of economic growth.

Well, it turns out that what was stable for much of the 20th century looks as if it is unstable in the 21st. For at least the past 15 years, and possibly for several decades, labor’s share of national income has been declining and capital’s share has been rising in most advanced and many emerging economies.

It is important that we understand why labor's share has declined, and whether that decline will continue. The answer could influence a range of policies, from education and training to taxation and transfers. In what follows, we describe what we know about the evolution of labor's share (including key measurement issues) and highlight several explanations of the observed decline that have recently been proposed.

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