Common Ownership, Indexing, and Welfare
Friday, Jan. 6, 2023 8:00 AM - 10:00 AM (CST)
- Chair: Alessio Piccolo, Indiana University
Common Ownership in Labor Markets
AbstractIn this paper, we study common ownership in U.S. labor markets, and document that com-
mon ownership more than doubled over the period 1999–2017. To identify the causal effects of common ownership on labor market outcomes, we use a firm’s addition to the S&P 500 index as a shock to the common ownership of its competitors in local labor markets. Using a matched difference-in-differences analysis, we find that, after a firm enters the S&P 500 in- dex, the average annual earnings per employee of its local competitors decrease relative to the counterfactual. The effect of S&P 500 index additions on employee earnings is stronger in local labor markets where the employment shares of S&P 500 firms were higher or union coverage rates were lower ex ante. The effect is not driven by changes in workforce char- acteristics. We also find that an increase in common ownership leads to higher separation rates in treated local labor markets. Perhaps surprisingly, it increases their hiring rates even more, resulting in an overall positive effect on total employment. While together these facts are inconsistent with the canonical oligopsony model, we show that they can be rational- ized in a generalized model of oligopsony with a recruitment intensity decision by firms.
Index Funds, Asset Prices, and the Welfare of Investors
AbstractWe present a general equilibrium model in which heterogeneous investors choose among bonds, stocks, and an Index Fund holding the market portfolio. We show that, under standard assumptions, an equilibrium exists. We then derive predictions for equilibrium asset prices, investor behavior, and investor welfare. The presence of the index fund (or a decrease in the fee charged by the index fund) tends to increase stock market participation and thus increase asset prices and decrease expected returns from investing in the stock market. As a result, few - if any - investors benefit from the availability of cheap market indexing.
A Tale of Two Networks: Common Ownership and Product Market Rivalry
AbstractWe 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.
University of Washington
University of California-Berkeley
- G3 - Corporate Finance and Governance