Rising Markups, Common Ownership, and Technological Capacities

Abstract

This paper analyses the impact of common ownership on markups and innovation and adds to the discussion of the recently observed patterns of a long term rise in market power. Using a rich panel of European manufacturing firms from 2005 to 2016, we structurally infer markups and construct a measure of common ownership. We use a propensity score reweighting estimator to eliminate biases due to observational characteristics and find an increase of firm markups ranging up to 3.4% in industries with high technological spillovers after the first exposure to common ownership. For companies directly held by common institutional investors, we also measure a positive effect on citation-weighted patents of up to 9.5% in high-spillover industries. Both findings are consistent with recent theoretical findings in Lopez and Vives (2019). We further exploit industry technology classifications by the European Commission to shed some light on the heterogeneity of the effect of common ownership across the sample.