Abstract

https://ssrn.com/abstract=2872754
 


 



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


Eric A. Posner


University of Chicago - Law School

Fiona M. Scott Morton


Yale School of Management; National Bureau of Economic Research (NBER)

E. Glen Weyl


Microsoft Research New York City; Yale University

November 29, 2016

University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 787

Abstract:     
Recent scholarship has shown that mutual funds and other institutional investors may cause softer competition among product market rivals because of their significant ownership stakes in competing firms in concentrated industries. While recent 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. We outline such a policy in this article. Investors in firms in well-defined oligopolistic industries must choose either to limit their holdings of an industry to a small stake (no more than 1% of the total size of the industry) or to hold the shares of only a single “effective firm” per industry. Investors that violate this rule face government litigation. Using simulations based on empirical evidence, we show that under broad assumptions this rule would generate large competitive gains while having minimal negative effects on diversification and other values. The rule would also improve corporate governance by institutional investors.

Number of Pages in PDF File: 50

Keywords: Common Ownership, Antitrust, Regulation, Corporate Governance

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


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Date posted: November 22, 2016 ; Last revised: January 17, 2017

Suggested Citation

Posner, Eric A. and Scott Morton, Fiona M. and Weyl, E. Glen, A Proposal to Limit the Anti-Competitive Power of Institutional Investors (November 29, 2016). University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 787. Available at SSRN: https://ssrn.com/abstract=2872754 or http://dx.doi.org/10.2139/ssrn.2872754

Contact Information

Eric A. Posner
University of Chicago - Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
773-702-0425 (Phone)
773-702-0730 (Fax)
HOME PAGE: http://www.law.uchicago.edu/faculty/posner-e/

Fiona M. Scott Morton
Yale School of Management ( email )
New Haven, CT 06520
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Eric Glen Weyl (Contact Author)
Microsoft Research New York City ( email )
641 Avenue of the Americas, 7th Floor
New York, NY 10011
United States
(857) 998-4513 (Phone)
HOME PAGE: http://www.glenweyl.com
Yale University ( email )
28 Hillhouse Ave
New Haven, CT 06520-8268
United States
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