Common Ownership, Competition, and Top Management Incentives

We present a firm-level mechanism through which common ownership can affect product market outcomes consistent with empirical evidence. Our theoretical framework embeds a canonical managerial incentive design problem in a model of strategic product market competition under common ownership. Firm-level variation in common ownership causes variation in managerial incentives across firms as well as variation in product prices, market shares, concentration, and output across markets—all without communication between shareholders and firms, coordination between firms, knowledge of shareholders’ incentives, or marketspecific interventions by top managers. We empirically confirm the theoretical prediction that top management incentives are less performance-sensitive in firms where large investors hold greater ownership stakes in competitors.