Common Ownership, Investment, and Economic Growth: A Theoretical and Quantitative Analysis

This paper examines the macroeconomic consequences of common ownership within a growth model featuring industry dynamics. Common ownership arises when financial investors hold stakes in multiple companies that compete in the same product market. The paper incorporates three key mechanisms through which common ownership influences corporate decisions: corporate governance, business stealing, and industry knowledge spillovers. In an economy characterized by common ownership, firms are generally less inclined to invest in quality improvements compared to firms in an economy without common ownership, as the majority shareholder often holds stakes in competing firms. The dynamic interplay between common ownership, firm size, market entry, and quality investment results in hump-shaped investment patterns over time. The paper calibrates the model to the U.S. economy and quantifies the impact of increased common ownership --- of the magnitude estimated by Azar and Vives (2021) for the U.S. between 1985 and 2015 --- on corporate governance, investment, and both short- and long-run growth. It also analyzes the welfare implications of these changes.