Thursday, January 26, 2017
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), and E. Glen Weyl, Microsoft Research New York City; Yale University offer A Proposal to Limit the Anti-Competitive Power of Institutional Investors.
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 — the original authors of the Act intended it to be used. 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.” 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.