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 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. Under the assumption that firms maximize a share-weighted average of their shareholders' income, we find that the welfare cost of common ownership, measured as the ratio of deadweight loss to total surplus, has increased about ninefold between 1995 and 2021. Under alternative assumptions about corporate governance, 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 led to a significant reallocation of surplus from consumers to producers.