How to Combat Common Ownership

Summary

Podcast Summary: Is Business Broken? Episode - "How to Combat Common Ownership"

Introduction to the Topic

In the April 10, 2025 episode of "Is Business Broken?" hosted by Kurt Nickish from the Questrom School of Business at Boston University, the discussion centers on the pervasive issue of common ownership—a scenario where major investors hold significant stakes across competing firms, potentially undermining competition, elevating prices, and stifling innovation.

Understanding Common Ownership

Kurt Nickish opens the conversation by revisiting the concept introduced in the previous episode:

"[00:00] Kurt Nickish: ...common ownership... can lower competition, raise prices and affect innovation."

The episode delves into potential solutions to mitigate these anti-competitive effects through policy reforms, governance changes, and self-regulation within the financial industry.

The Challenge of Solving Common Ownership

The guests elaborate on the complexities involved in addressing common ownership. Fiona Scott Morton reflects on the difficulty of finding viable solutions beyond theoretical discussions:

"[01:59] Fiona Scott Morton: ...we have not seen much of a flowering of solutions other than, I will say, the paper that Glenn and I and Eric wrote a few years ago."

Policy Interventions: Limiting Ownership Stakes

A significant portion of the discussion focuses on limiting ownership stakes in competing firms as a primary solution. The proposal suggests capping ownership stakes at 1% to reduce the influence of institutional investors over multiple competing entities.

"[08:04] Glenn Weil: ...your paper recommends this limit to be 1%."

Rationale Behind the 1% Limit

Fiona Scott Morton explains the choice of the 1% threshold:

"[08:29] Fiona Scott Morton: ...the Big mutual funds... they were all in the 3, 4, 5% at the time we were looking, but there are thousands and thousands and thousands of mutual funds. And so we thought that one was pretty conservative."

Implementation and Enforcement

The guests discuss the practical aspects of enforcing such a limit, emphasizing the need for legislative action and robust monitoring by regulatory bodies like the Federal Trade Commission (FTC).

"[10:08] Fiona Scott Morton: ...you need a law. You need Congress to pass a law... mandate information from the larger asset management companies about their interactions with their portfolio firms."

Potential Impacts and Criticisms of Ownership Limits

Addressing concerns about diversification, Fiona argues that limiting stakes to one per competitive firm would not significantly harm investment diversification:

"[11:30] Fiona Scott Morton: ...you don't actually want to hold four airlines... when you hold more than one airline, the additional diversification benefits are minimal."

The discussion also touches on how mutual funds could restructure to comply with the new limits without substantially impacting their ability to diversify investments.

Alternative Solutions: Reforming Shareholder Voting Rights

The conversation shifts to another proposed solution: reforming shareholder voting rights to mitigate anti-competitive pressures. This idea involves institutional investors abstaining from voting to prevent undue influence over corporate decisions.

"[17:17] Theodore Nirenberg: ...the idea was that it was not so important to have intra industry diversification."

However, concerns are raised about the potential for increased corporate governance issues if diversified owners choose not to engage in voting:

"[19:10] Fiona Scott Morton: ...you could end up with more corporate governance problems."

Regulatory and Political Hurdles

Implementing these policy changes faces significant regulatory and political challenges, primarily due to the strong influence of the financial services industry in policymaking.

"[30:00] Fiona Scott Morton: ...Financial services are incredibly strong politically... it's very rare for any policymaker who represents end consumers to win against financial services."

The Role of Antitrust Regulations

The guests advocate for expanding antitrust regulations to address common ownership. They highlight the necessity for comprehensive data collection and empirical research to build a robust case for legal action.

"[22:18] Fiona Scott Morton: ...collect very good data about who owns what... and then track exactly how much common ownership there is."

Conclusion and Future Outlook

As the episode concludes, the guests reflect on the ongoing rise of common ownership and the urgent need for regulatory intervention. They express optimism that increased awareness and research will eventually lead to effective policies to preserve competition and protect consumer interests.

"[35:55] Glenn Weil: This has been really fascinating. Florian, Glenn, Fiona, thanks so much for bringing your expertise and insights to this conversation."

Key Takeaways

• Common ownership poses significant threats to market competition, pricing, and innovation.
• Limiting ownership stakes to 1% across competing firms is proposed as a viable policy intervention.
• Reforming shareholder voting rights is another potential solution, though it carries governance risks.
• Regulatory and political obstacles are substantial, given the entrenched power of the financial services industry.
• Comprehensive data collection and empirical research are essential for building a strong case against common ownership.
• The issue requires collaborative efforts between policymakers, economists, and regulatory bodies to devise effective solutions.

This episode underscores the complexity of addressing common ownership and the critical need for multifaceted strategies to ensure healthy market competition and innovation.

Transcript

[Kurt Nickish]

You're listening to Is Business Broken, A podcast from the Mehrotra Institute for Business, Markets and Society at Boston University Questrom School of Business. I'm Kurt Nickish. In our last episode we introduced the concept of common ownership. That's where major investors buy significant stakes across competing firms and how that can lower competition, raise prices and affect innovation. But what could be done about that? Is there a way to address these anti competitive issues? Today we'll explore potential solutions through policy, governance and self policing. Can regulatory changes help preserve competition without stifling investment? Are there ways to redesign corporate structures to mitigate the negative effects of common ownership while still fostering growth? Will the financial industry fight these changes or help frustrate find a solution? Our guests today are Fiona Scott Morton, Theodore Nirenberg, professor of Economics at the Yale School of Management, Glenn Weil, Founder of the Radical Exchange foundation and the Plurality Institute, and Florian Ederer, Alan and Kelly Questrom, professor in Markets, Public Policy and Law at BU Questrom.

[Glenn Weil]

Fiona, glad to have you here.

[Fiona Scott Morton]

Thank you very much.

[Glenn Weil]

Glenn, great to see you.

[Theodore Nirenberg]

Yeah, Kurt, thanks for having me.

[Glenn Weil]

And Florian, great to have you back.

[Florian Ederer]

It's wonderful to be back.

[Glenn Weil]

So in last week's episode we discussed some of the anti competitive issues with common ownership and today we're going to be looking at solutions. This is kind of open to all of you, but as economists, you are accustomed to trying to think about how to adapt a market system to maximize private and social good. Is common ownership just among the problems that you think about solving?

[Kurt Nickish]

Is it a hard problem to solve?

[Fiona Scott Morton]

I think yeah. When Glenn and I first wrote that paper together with Eric Posner, I mean, it started with Glenn in my office and we were venting a little bit about the existing literature, throwing up its hands and saying, oh, there are these three things we want. Governance, competition, and, you know, opportunities for savers to save in a diversified manner. And we can't have them all. And Glenn and I said, well wait, we're economists. Our job is to figure out what's the second best. I mean, we can't have the first best here, but surely we can do something more than just throw up our hands. So it wasn't such an obvious solution or easy problem that everybody who looked at it said, oh sure, here's how you solve that or that's obvious or let me write a paper. And so I would say to date we have not seen much of a flowering of solutions other than, I will say, the paper that Glenn and I and Eric wrote a few years ago.

[Glenn Weil]

Glenn, why is this something you decided to study? Why did you identify it as a problem?

[Theodore Nirenberg]

At the time, I was very attracted to the notion that we had spent too much time in economics, focused on detailed evaluation of very small effects and problems and not enough on thinking sort of creatively and being willing to follow our thoughts to their final conclusions about things that might, at a very broad level, shift our way of thinking about the whole way the economy works. That's what really drew me to this problem, is that it was something really systemic. There was a guy named Jose Azar who first sent me his paper on this, and it really convinced me that there was something really kind of systemic to the whole way the economy is organized that might be off in this issue. And that's why I got interested in it.

[Glenn Weil]

It's kind of one of these classic unintended consequences of market forces.

[Theodore Nirenberg]

Well, it's actually funny because I actually don't know if Fiona and Florian know this, but Jack Bogle, who was probably the single person most responsible for this sequence of things, he was the pioneer.

[Glenn Weil]

Of Vanguard, right, which basically pioneered and spread this kind of revolution in index fund investing, which basically made stock market investing more accessible to a whole number of people.

[Theodore Nirenberg]

Yeah, and he was a personal hero of mine. He sponsored the scholarship that my wife had in college.

[Glenn Weil]

You were more than acquaintances.

[Theodore Nirenberg]

Yeah, we went to his house, he was at our wedding. He was a very important person to my life. And it really changed my perspective to think about the other consequences and really ended up being important to me personally because it made me think about the ways in which we always have to think about even the things we most admire, we think are most idealistic, the problems they can end up creating.

[Glenn Weil]

Now, Bogle died in 2019. I have to ask, you must have had conversations with him about common ownership as a problem. Did he see it as a problem?

[Theodore Nirenberg]

I did. About a year before he died, I went to see him and his wife and we had a long discussion about it. And he remained quite skeptical of the whole story we were telling at the time I talked to him. But he evolved quite a bit in the months afterwards. And just a few months before he died, he was actually quite concerned about the issue and quite open to the problems that it was creating. So he was a very thoughtful person, even in his old age and someone I very much admire.

[Glenn Weil]

That's interesting. We heard from Florian in the last episode about how this hasn't always been the most popular topic to research and to point out problems with in a pretty established moneyed industry.

[Theodore Nirenberg]

I think in general economics is very risk averse. And so anytime you are taking on a very macro level thing that shifts so much in terms of the structure of the economy, in terms of how it would be organized, you're going to have a lot of challenge doing that in economics research.

[Fiona Scott Morton]

Yeah, I'll say, Glenn, that I think it was particularly exacerbated in this case because the harm was obvious to people who study industrial Organization and competition because that's occurring in the product market. But the guys who study finance barely knew what I o and competition was. And so they could just see one half of the problem, the good half and not the bad half. And these papers then floated in between those two fields, the study of the problem and the policy solutions. And I remember giving our paper to the finance group upstairs and it took them a whole hour and a half and they didn't really like it, even many of them at the end of an hour and a half, and it was a further hallway conversation of another hour where I had to convince one of my colleagues that I was not against mutual funds, that I thought diversified savings vehicles were really a good idea. That was an emotional thing. It wasn't anything about the policy. It was making sure that I was on board with the goal of being able to let savers save. And once he was convinced of that, then he was willing to listen to the rest of it. It's very interesting.

[Theodore Nirenberg]

I think Fiona's absolutely right. But I also think it reflects a broader thing about economics, which is that almost everything in economics gets these silos. And there's kind of like a set of topics that each of the subfields is supposed to deal with. And most of the interesting problems in the world span these silos. I mean, you think about all the industrial policy issues that have been very prominent in the last eight years and they're totally at the intersection of international trade, development, political economy and IO. And there's very few people who have knowledge of those things. It's very hard for economists to write about those. NIO just for shorthand, Industrial Organization, Competition Economics.

[Glenn Weil]

Yeah, yeah, got it.

[Kurt Nickish]

So let's get into some of the.

[Glenn Weil]

Policy interventions that you suggested in this paper. And one was limiting ownership stakes in competing firms. Like that's the root cause in some sense that you have these institutional investors owning significant stakes in competing firms. Your paper recommends this limit to be 1%. How did you dial in on that number? And how would this work in practice?

[Fiona Scott Morton]

Well, we dialed in on the number because if you look at the Big mutual funds that are likely to be the ones making some inputs into firm strategy and being contributors to this problem. They're all in the 3, 4, 5% at the time we were looking, but there are thousands and thousands and thousands of mutual funds. And so we thought that one was pretty conservative.

[Glenn Weil]

Gotcha. This 3 or 4% can add up to 20 or 40% if you put all the big institutions.

[Theodore Nirenberg]

The practical thing you wanted to do is you wanted to get all of the big players in above the 1% threshold, but you didn't want to, like, start bringing in a thousand little firms that would have to comply with something that weren't actually making material difference anyway. And plus, one is round.

[Fiona Scott Morton]

And it happens, one is a nice round number.

[Theodore Nirenberg]

Yeah, yeah, right.

[Glenn Weil]

A lonely number, too, apparently. So how would this work in practice? What's the mechanism to make this happen and enforce it?

[Fiona Scott Morton]

Well, you need a law. You need Congress to pass a law, which, of course we understand is not a practical suggestion today, but it's very valuable to figure out what the right answer is, even if you don't think you can implement it today. And our thought was that every year the FTC would do the best job they could at identifying product market competitors that map into corporations and then identify what those overlaps were. And then an asset manager that only held one firm in each of those product markets would be in a safe harbor so that they could not be pursued for an antitrust violation, lessening competition in one of those product markets, because they were following this rule of holding less than 1% or holding only one firm.

[Theodore Nirenberg]

I guess in theory, Fiona, it could be the case that if you were to find common ownership was a violation of existing antitrust laws, existing Clayton act, that this could have been done as some kind of a safe harbor by the FTC on its own. But I think that's probably a pretty unlikely scenario to play out.

[Fiona Scott Morton]

Yeah, I think that's right. If you thought that you could win in court on one of these big firm cases, then as the ftc, you could promulgate a policy statement that said, look, we know that this is harm. We don't really want to sue everybody. That's a waste of resources. So here's the solution. Confine yourself to one firm per market, and we will not be prosecuting any asset manager that complies with that, and we'll just save our concerns for those who don't comply.

[Glenn Weil]

So critics might argue that limiting ownership stakes to 1% right, in one competing firm undermines diversification, hurting passive investors. Pension funds, you know, that would reduce their low cost diversification, increase market volatility. You obviously thought of that. Like, how do you respond to those concerns?

[Fiona Scott Morton]

That one turns out to be super easy. If you want to diversify your portfolio, you don't actually want to hold four airlines. You want an airline, some banking, some consulting, some computer chips, some mines, you know, random. All different kinds of stuff.

[Glenn Weil]

You don't need the S&P 500. You maybe need the S&P 100.

[Fiona Scott Morton]

You just don't need all four airlines. And if you simulate this using past returns, you get almost nothing from holding more than one airline. And when you look at the very wealthy, what do they do? They don't even hold all stocks. They're in golf courses and foreign assets, and no one's holding four airlines.

[Theodore Nirenberg]

Yeah, I think the diversification benefits of diversifying across are actually quite small. I have come to my own evolution of perspective on different ways to solve this problem. That isn't exactly what it was when Fiona and I wrote this, but I don't think that the main objection that was made to our proposal carries a lot of weight. I mean, it might be some effect, but it's probably such a small effect that in the broader scheme of things, it's negligible.

[Glenn Weil]

How would an institutional investor offer this to customers? How do you imagine that they're not selling the S&P 500 index fund? They're selling what?

[Theodore Nirenberg]

I mean, the way I thought of it by analogy to something like fantasy football. When you have a fantasy football team, obviously you don't just have one of every person in the whole league.

[Glenn Weil]

You don't have every running back.

[Theodore Nirenberg]

But on the other hand, everyone has a running back. So you would probably pitch yourself in a more differentiated way, as we've got R this and R that. It would be much more similar to the way that a conglomerate typically works. In a lot of developing countries, there are conglomerates that have a firm in just about every industry, and they're all the Reliance this or the Tata that or whatever. And I think probably ultimately this would end up with a little bit of that type of a flavor.

[Glenn Weil]

Okay.

[Fiona Scott Morton]

So, although let me say, Glenn, if this were really the rule, every mutual fund would be doing this.

[Theodore Nirenberg]

Oh, I totally agree. It's just that they would have different ones. You know what I mean? Right. So in other words, everyone would have their fantasy football team, and every fantasy football team would have its running back and its quarterback and its, you know, et cetera. That's a little bit of an exaggeration But I think that's a good way to like conceptually think of it.

[Florian Ederer]

Yeah.

[Fiona Scott Morton]

And there'd be passive mutual funds and then there would be this FTC compliant mutual fund category as Glenn is describing.

[Glenn Weil]

Florian, you've been listening. You know, we just talked about this proposal to limit ownership stakes. Florian, do you have anything to add to that?

[Florian Ederer]

I think the most convincing argument for me was always that it was not so important to have intra industry diversification. It was really much, much more to have inter industry diversification. So when Fion first showed me some of the simulations that she did, it was really, for me, the truly convincing thing that there was just this strawman argument out there that the asset management companies wanted to just do this in a very, very low cost way, but weren't really ever thinking outside the box of thinking. Well, it surely can't be that difficult just to pick one firm per concentrated industry and then just offer diversified investment across all of these. And if you look at the costs also of these, the cost for diversified investing, miniscule. And they tend to not actually be the main thing deterring investors from doing this. We've had index funds now for well over two decades, and the penetration that they have in the retail investor market is still only to the order of 20 or 30%, even though everybody knows that they are the better investment compared to the mutual funds. And so it's not really an issue of them being a much lower cost, but just that there seems to be some barrier that retail investors are not willing to jump over or they're just being uneducated about.

[Theodore Nirenberg]

It's actually kind of interesting, I think in this moment what our proposal might have ended up leading to, if it's enacted, might be. I wonder if Fiona thinks about this, but it might be actually something a little bit colorful and maybe even a little political because it's not in every industry, but in many industries at the present moment, there's kind of political alignments that certain firms in the industry have that differ from each other. And I can very much imagine that this whole sort of ESG fund thing goes kind of wild and that you would end up with companies that sort of choose different sort of political or social flavors and then choose the champion from each industry that has that flavor. You can imagine one fund having Tesla in the car industry and another one holding a more normal American motor producer and so forth. But I don't know what you think about that, Fiona, but I think just in this present moment, I can imagine.

[Glenn Weil]

It could get a little colorful it is interesting. You can see that there's a marketing and product management problem here that mutual funds would have to solve, but it also seems solvable.

[Fiona Scott Morton]

Yeah, the thing that could make that a little difficult, Glenn, would be if there was a lot of demand for one of those positionings. And that meant there was for some reason a lot of demand for say United Airlines stock. And that left Delta stock as very favorably priced. And so then you would actually just face a trade off between that kind of political statement or branding and getting a good return. And so I think there would be perhaps some non positioned mutual funds that just went for whatever they thought was cheapest.

[Glenn Weil]

Okay. Another potential solution that you propose would be to reform shareholder voting rights. The idea is to mitigate the anti competitive effects of common ownership. Can you explain how altering voting structures could change corporate decision making? How would that work?

[Theodore Nirenberg]

So the idea there was that, you know, if you wanted to keep large stakes and diversification, you could just agree not to vote. And maybe not just not to vote, maybe not to meet with directors, other ways that you might influence their decision making.

[Glenn Weil]

And the idea here being that you can circumvent the basically anti competitive pressures.

[Theodore Nirenberg]

It's almost like a blind trust that they do for politicians, you know, when they put their. I mean it's not exactly that, but you can think of it if you were trying to create this quote, Chinese wall between two different spheres, a more political action sphere and a financial sphere, you could do it. That I guess my concern about that, and we had this concern at the time, and that's why it was not our leading proposal, and I've got come to feel even more that way, is that if you take the set of all owners who are not owning through this diversified way, they're not really representative of all the owners of the company. And in some cases that might matter more or less, but there's no reason that that necessarily has to be the case. And it could be that you end up, for example, with some very activist set of owners or with some very wealthy set of owners who really don't have the overall interest of the company in mind. And if these diversified holders are just sitting it out, I'm not sure that that's an entirely satisfactory solution in every case because you might end up swaying things towards some other kind of more special interests. I don't know what you think about that these days, Fiona and Florian, but.

[Fiona Scott Morton]

Yeah, I agree, you could have in finance something called tunneling, which is some owners of the firm, let's say, also own a supplier to the company and their influence causes the company to overpay the supplier. So in some sense they're tunneling out profits from the main company into their supplier. And you could imagine, as Glenn said, if the bulk of the owners that are entitled to the profits of this corporation are not voting, and you've got some minority shareholders who are voting and they own the supplier, then maybe you would end up with more corporate governance problems.

[Theodore Nirenberg]

Of that I think that would be most likely to happen. If you have like almost all the diversified owners taking this approach of not voting. If you just have one, it's probably fine. But the worry would be if that becomes the industry standard, I'd be concerned about what that could do.

[Florian Ederer]

I always also preferred the other proposal that Fiona and Glenn had in their original paper. This one about not voting always sat a little uneasy with me because I was worried about exactly the passivity that would then result from this. In that you have a very, very large block of owners that essentially then are not engaging at all with management or are prohibited from engaging with management.

[Glenn Weil]

These are some of the owners that actually have the most scale and resources to actually influence or to discover fraud.

[Theodore Nirenberg]

Or things like this. You know, there's all kinds of issues, tunneling is one of them, but also fraud is another.

[Florian Ederer]

I'm sympathetic to the idea that these large diversified asset management companies do bring a certain know how of how to do corporate governance. And if we're taking those out, then maybe there's nobody there who really disciplines management, who gets management to do all those cost saving things or all these aggressive product market strategies that we would like to see shareholders push.

[Theodore Nirenberg]

I mean, conceivably there's some solution where you could allow this, but the company might have to pay some fee for the amount that they're saving by effectively free riding on other people's management of the company. That. But you'd have to think about how that would work. I just worry that you could create this incentive to become that free rider and that the whole industry might go that way and that that would be a problem.

[Glenn Weil]

I think we've mentioned some of the ways that antitrust regulators might be better able to address common ownership. Right now though, when we think of that, you know, we think of the Clayton act, which has been mentioned, we think of really a focus on mergers and acquisitions. There have been clear problems in the past and the Clayton act has kind of been caught up to practices to help fight antitrust and anti competitive issues in the market. This is happening now. Common ownership is A problem now, should regulatory agencies expand their focus to include institutional ownership structures? For instance, is this a place that they need to move into?

[Fiona Scott Morton]

I think so, but the issue would be you have to do it in stages. The first thing you have to do, if you're one of the government agencies in the US and I'm not quite sure who's best positioned, but one of them needs to collect very good data about who owns what, and then track exactly how much common ownership there is, and then also mandate information from the larger asset management companies about their interactions with their portfolio firms. How much do you talk to them? How much do you vote? How much do you advise on strategy? How much do you. Whatever it is so that we can start to work out what the mechanism of action is. Florian has a very nice paper about this. There are a number of other people who have research efforts showing us the extent of common ownership, the results of common ownership. There's very little on the mechanism of action. And even if you had five more research studies to win in court, you have to have a body of knowledge that is robust so that a judge can say, I am relying on this thing that is known and is really true, and that would be helped greatly by public authorities collecting the right data, letting economists work with it, working with it themselves, and figuring out exactly the magnitude of the harm, then you can really have a case that trades off that harm, if it exists, against any benefits that exist, and you can think about a policy that is tailored to the nature of that harm.

[Theodore Nirenberg]

Florian, what is the state of the consensus right now? Has this come to be relatively consensus, or is it still as controversial as it was when I was in the literature.

[Florian Ederer]

It's definitely not as controversial as it was, I think when you pretty much paved the way for there to be a literature. I think I was very inspired by your original. Was it. Was it in the Atlantic, Slate, the Arctic and Slate? In Slate, yeah. Where, you know, you called common ownership one of the biggest antitrust issues of the 21st century. And I thought that's what really inspired me to write on this stuff. But it was hyper controversial. And I think it required exactly established scholars like Fiona to talk to people, to remind them to say, to explain the issue over and over and over again for it to become less controversial. If I could go back now, five years ago, I would certainly even present the issue somewhat differently. I certainly learned a lot along the way of how to convince people that this is an issue and that we're not out there and saying this is a capitalist Conspiracy and they're exploiting all of these poor consumers. I think a lot of it is really just getting people on board. And then certainly also what helped, and I think that speaks a little bit to the dysfunction that exists in economics that I think, Glenn, you might be remembering also from your time, is that everything takes on more weight as soon as you publish a paper in a leading journal. And I think as soon as you get that rubber stamp, a lot of people suddenly say, oh, now of course, I always knew that that was an important issue, but I think because it takes a long time to get there, it, it's a long process.

[Fiona Scott Morton]

But let me just say a different thing, which is, I fully agree with everything you said, Florin, but you can have convinced all practicing or almost all practicing empirical industrial organization economists that this is a viable issue with evidence. And that is not enough in court. In court you have to have more evidence because the theory doesn't matter to a court. We all understand the theory and we're done when the theory is so clear. But that's not how it works in courts. And then because the court has to make trade offs with other social objectives, the court really cares about the magnitude and if there's going to be a policy response, we also really care about the mechanism. So all of that has to be figured out in a very solid way before you're going to get the legal system to respond.

[Glenn Weil]

What I'm hearing is that there's a growing realization broadly that this is a problem. And now there are these questions about what to do about it. Are there market driven solutions that could address this without regulatory intervention? Like could the industry itself?

[Fiona Scott Morton]

No.

[Glenn Weil]

Okay. It can't police itself. New financial instruments, alternative ownership structures.

[Theodore Nirenberg]

I mean, there are some very ambitious, abstract, high level things that could conceivably take place, but they would always involve some kind of collective or government or international or some kind of coordination. You could imagine a scenario in which the companies continue to participate and continue to vote, but there's more direct participation by the owners and they're regulatorily bound to like follow what those owners or what the consumers or something like that says that they should be doing.

[Kurt Nickish]

That's interesting.

[Glenn Weil]

Yeah.

[Theodore Nirenberg]

And I mean, you'd have to think about exactly how to organize that and who's the representative people putting them effectively under more political direction rather than just them representing the interests of capital.

[Glenn Weil]

Yeah. Fiona, why did you say no?

[Fiona Scott Morton]

Because they're all profit maximizing. There's nothing individually. There's no incentive for anybody to do anything different.

[Theodore Nirenberg]

Yeah. I'm not sure. That's where I'm not sure. I completely agree with Fiona. There are other arrangements that could occur. Vanguard, for example, is actually, depending on how you think about it, somewhat nonprofit. And you could imagine them really having kind of a more political charter. And in fact, they have in some ways had that in various ways at various points in time. But I don't think that happens without some kind of public pressure of some kind. I'm not saying it necessarily has to be done by an antitrust regulator. It could be done by politicians or, you know, I don't know.

[Fiona Scott Morton]

I think basically under the status quo, what everybody's easiest course of action is, is what they're doing right now. And while I agree with Glenn, they could change, that would require a lot of work and they'd have to explain it to their customers and they'd have to rebrand and it would be confusing. And their customers are not the average consumer. They're relatively rich. And so the goods that they're buying are not the ones that are the same that are made by the firms that they're holding. And so it's not clear that you'd be helping your own customers and that would be a problem. So really the harmed party here is the mass of end consumers who vote.

[Theodore Nirenberg]

And workers as well, of course. Yeah.

[Florian Ederer]

I mean, I think this is a general feature of antitrust, which is that as economists, we love markets and we would love markets to fix certain things. But antitrust is exactly the situation where the markets don't quite work and where the self interest and the profit maximizing interest or the objective function of those firms are exactly run counter to those stated aims. And that's why we have antitrust. And common ownership is just another example of an antitrust issue where we need laws and we need regulation, and unfortunately it's not going to be fixed by new entrants coming in or it's not going to be fixed by new competitive pressures or innovation. Just taking all of these problems away that common ownership creates.

[Glenn Weil]

Yeah, no voluntary disclosures on their part. It's gonna change that.

[Florian Ederer]

Yeah, exactly.

[Fiona Scott Morton]

Yeah.

[Glenn Weil]

Okay, so you, Florian, you and Fiona have just sort of outlined why any reforms would likely face strong resistance from those institutions. What about political and legal hurdles to enact sort of meaningful policy changes?

[Fiona Scott Morton]

Financial services are incredibly strong politically, and it is very rare for any policymaker who represents end consumers to win against financial services, just as it is to win against pharma is nearly impossible. And that's why pharmaceutical prices are high and profits in financial services are high. We can't design the regulation to make it competitive and lower those profits. So I think the most likely route would be if there could be research that again lets an agency win in court under existing antitrust laws that would create leverage that the industry would then want some regulation because they would be exposed to an antitrust case every time they bought shares of United. And that's really annoying. If you run an investment fund, you would like some rules that let you just do your job and think about the money management and not the competition angle. So that's the path I see.

[Theodore Nirenberg]

I guess. Fiona, one question I have about that is given the current political environment and the concerns about the positions staked out by BlackRock regarding ESG issues and the whole fight over DEI right now, I almost wonder if there isn't ironically maybe some momentum around trying to reduce the influence that these diversified holders have.

[Fiona Scott Morton]

Yeah, but then it would be done in the way that I think all of the Trump administration things have done, which is just very brute force. Let's attack them as opposed to something sophisticated that would help consumers and improve competition en route.

[Glenn Weil]

I mean, we talked about the legal avenue. What is the most realistic first step for legislators then or, or for regulators to, to take?

[Florian Ederer]

I think, you know, one of the things that Fiona already mentioned earlier is just that it's actually surprisingly difficult to know who owns the largest publicly listed corporations in the US and in the world. And it is somewhat stunning to me that there isn't better disclosure that could inform more research on common ownership and more empirical evidence and common ownership. We just don't even know who owns all of these various large corporations.

[Glenn Weil]

When I heard that, I thought that was probably an easy thing to collect, but it's not.

[Florian Ederer]

Turns out it requires an army of research assistants and many expensive data subscriptions to even compile a data set that's.

[Fiona Scott Morton]

Messy, a data set that's not perfect. And so I think it is completely reasonable for the American people to expect that any corporation that's doing business in the United States has to list who its owners are, the natural persons as well as the corporate persons.

[Glenn Weil]

We recognize that this will take some time. We're not sure how it's going to play out, but we know from the past that regulation has caught up to market activity when action is taken. What will you be looking for for indicators of success?

[Florian Ederer]

Well, it's always difficult with anti competitive effects that you need to have the right counterfactual. You need to understand what would have happened if this hadn't been, you're not going to see. Suddenly the regulation comes into place and then suddenly prices drop. I think only in the most extreme cases would you see such a strong response. So I think hoping for lower consumer prices or more innovation or more aggressive competition, just from an introduction of a new law is something I think every industrial organization economist dreams about, but very, very rarely sees.

[Theodore Nirenberg]

One possibility that you could look for FL is that there are certain sectors of the economy where publicly traded firms supply a smaller share of the total output of that sector.

[Glenn Weil]

So there are some mechanisms that it's.

[Theodore Nirenberg]

Not like giant corporations do everything in our world. They own certain things. But it's not true that diversified owned, publicly traded companies do everything. And so you might expect prices to fall relatively in the corporate controlled industries compared to industries where there's a lot more small business.

[Fiona Scott Morton]

There's two ways of thinking about the outcome. One is the intermediate step. Do we see less common ownership? For those of us who are fairly convinced of the theory, if I have common owners and it's in their interest to soften competition, then they're going to do that. Then there's the second thing, which is what Glenn and Florian were talking about, which is, well, what would be that impact on competition? And it would be lower prices and more innovation and so on. And as Florian said, in the competition policy space, we don't really have very many papers showing things like that because they work out at such a broad scale over such a long time in little itty bitty pieces that are mixed in with everything else. So we don't typically expect to measure something like that.

[Florian Ederer]

I think even the intermediate step would be, would be a success, which is that we're not going to get such a, you know, earlier we were talking, Fiona was talking about 3 and 5% shares. That was, you know, when she wrote the paper on this stuff. And now we're well past that 3 and 5% stuff as various people have documented. So I think even, I don't think common ownership is going to go down, it's going to keep rising. But if we could somehow reduce the rate of growth of common ownership, I think even that would be a success.

[Glenn Weil]

This has been really fascinating. Florian, Glenn, Fiona, thanks so much for bringing your expertise and insights to this conversation.

[Theodore Nirenberg]

Glad to be here.

[Fiona Scott Morton]

Thank you.

[Florian Ederer]

Thank you.

[Kurt Nickish]

On our next episode, we look at short termism, the tendency for companies to chase quick wins instead of long term results. How big of a problem is it and how does short term thinking shape business strategy, innovation and the broader economy that's next episode. Find it and more on Apple podcasts, Spotify or wherever you listen. Thanks for listening to Is Business Broken?

[Glenn Weil]

I'm Kurt Nickish.