This extremely rough and informal draft memo is intended as a reply to Professor Einer Elhauge, who wrote a wonderfully argued and supremely comprehensive piece on the evolving debate over “common ownership”. Elhauge’s article stands as a seminal contribution to this discussion, alongside pieces by John C. Coates; Posner, Morton and Weyl; Hemphill and Kahan; Rock and Rubinfeld; Bebchuk and Hirst, and of course Azar, Schmalz and Tecu. I would like to raise some objections to the alleged anti-competitive effects of common ownership which I do not believe have emerged thus far in the debate. I will not attempt to respond to Elhauge’s article in its entirety, only to a tiny fraction of the ideas broached. This informal memo assumes a high degree of familiarity with the arguments being made on each side. For a more general treatment of the subject, please see “Index Funds: Promise or Peril” on Cato at Liberty.
I will be borrowing some terminology from Hemphill and Kahan, who refer to common owners as “CCOs” and non-common owners as “NCOs”. I will not attempt to rehearse their objections here, and would instead commend their article “The Strategies of Anti-Competitive Ownership” to everyone. Rather, I would like to add some original contributions by using accessible arguments that anyone acquainted with the prisoners’ dilemma may understand. Therefore, when I use the word “cooperation” below, it is not intended to mean explicit collusion either between a firm’s managers and owners or between the managers of different firms. Elhauge cites an excellent article by Jose Azar which demonstrates that this need not be the case for management to act in an anti-competitive manner.