A Proposal to Limit the Anti-Competitive Power of Institutional Investors

Abstract

Recent scholarship has shown that institutional investors may cause softer competition among product market rivals because of their significant ownership stakes in competing firms in concentrated industries. However, while calls for litigation against them under Section 7 of the Clayton Act are understandable, private or indiscriminate government litigation could also cause significant disruption to equity markets because of its inherent unpredictability and would fail to eliminate most of the harms from common ownership. To minimize this disruption while achieving competitive conditions in oligopolistic markets, the Department of Justice and the Federal Trade Commission should take the lead by adopting a public enforcement policy of the Clayton Act against institutional investors. Investors in firms in well-defined oligopolistic industries would benefit from a safe harbor from government enforcement of the Clayton Act if they either limit their holdings of an industry to a small stake (no more than 1% of the total size of the industry) or hold the shares of only a single “effective firm” per industry. Free-standing index funds that commit to pure passivity would not be limited in size. Using simulations based on empirical evidence, we show that under broad assumptions this policy would generate many times larger competitive gains than harms to diversification and other values. The policy would also improve corporate governance by institutional investors.

Keywords: Common Ownership, Antitrust, Regulation, Corporate Governance

JEL Classification: D43, G23, G34, K21, L13, L41