Working Paper: NBER ID: w30004
Authors: Florian Ederer; Bruno Pellegrino
Abstract: We study the welfare implications of the rise of common ownership in the United States from 1995 to 2021. 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 and 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 estimates the welfare cost of common ownership, measured as the ratio of deadweight loss to total surplus, has increased about nine-fold between 1995 and 2021. Under various corporate governance models the deadweight loss of common ownership ranges between 3.5% and 13.2% of total surplus in 2021. The rise of common ownership has also resulted in a significant reallocation of surplus from consumers to producers.
Keywords: No keywords provided
JEL Codes: D43; D85; E23; G23; G34; L16; L21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Common ownership (G32) | reduction in competition (L49) |
| reduction in competition (L49) | higher prices (D49) |
| reduction in competition (L49) | lower quantities produced (L69) |
| Common ownership (G32) | higher prices (D49) |
| Common ownership (G32) | lower quantities produced (L69) |
| Common ownership (G32) | significant deadweight loss (D61) |
| Common ownership (G32) | reallocation of surplus from consumers to producers (D61) |
| Common ownership (G32) | increase in corporate profits (G30) |
| Common ownership (G32) | decrease in consumer surplus (D11) |