Ownership illusions: When ownership really matters for economic analysis

A common unit of economic analysis is the firm. Firms are assumed to maximise profits, subject to the well-recognised caveat that incentives of owners and managers can differ. Less well recognised is how ownership structures themselves affect incentives, behaviour and economic outcomes. With the wrong assumptions about ownership and when it matters, economic analysis can misrepresent economic reality. Such situations we refer to as ownership illusions. We show how attention to ownership structures can change subsequent economic analysis through four examples of ownership illusions. In competition policy, the incentives of firms are blurred by cross-ownership, leading to questions around the validity of default models and exactly how the incentive-driven process of competition is to be understood. When assessing the economic performance of privately or government owned businesses, the capital value of ownership is often ignored when in public ownership but is a primary metric of success when in private ownership. Retirement income systems reliant on individual ownership of financial assets are often inaccurately described as “pre-funded”, by way of contrast with pay-as-you-go or “unfunded” public pensions, regardless of differences in underlying capacity to support cashflows but simply because there exist no priced ownership rights for future pensions. In housing policy, the idea that competition between landowners can push down land prices reflects incentives from product market models where ownership dispersion matters, not those from the “location franchise” model of monopoly that land involves in reality. Identifying this class of problems in economic reasoning can help refine our economic understanding and foster more consistency in future analysis.