Reply to BlackRock’s Barbara Novick

In an op-ed published yesterday in the Wall Street Journal, Barbara Novick, a top executive at BlackRock, criticizes our call for reform of institutional investors to ensure they do not reduce competition. She says our argument in A Proposal to Limit the Anti-Competitive Power of Institutional Investors (written with Fiona Scott Morton) lacks “economic logic and factual support.” We naturally disagree.

First, she claims that institutional investors have no incentive to raise prices because some of their customers are businesses that institutional investors own. This is like saying that a gasoline monopolist would not raise the price of gasoline because some of its employees drive cars. No economist would accept this argument.

Second, she claims markets have become more competitive during the rise of institutional investors. The truth is the opposite, as noted by the Council of Economic Advisors and dozens of recent papers in leading economics journals.

Finally, she accuses our proposal of “eliminating the benefit of diversification.” Much of our paper is devoted to showing that our proposal would diminish diversification by a de minimis amount. Furthermore, and contrary to her claim that “investors would be forced to decide which fund manager might select the highest performing company in each sector,” our proposal allows individuals to diversify as much as they wish across institutional investors.

(Written with Glen Weyl)