POLITICAL DISCRETION AND ANTITRUST POLICY.

• Author: Baker, Richard B.
• Position: USA YESTERDAY

FOR THE PAST 40 YEARS, the level of concentration within many sectors of the U.S. economy has increased substantially. This rise in concentration has been associated with a decline in both competition and labor's share of income as well as a slowdown in aggregate output. The failure of antitrust authorities to restrain these developments has provoked concerns that existing antitrust statutes no longer may offer regulators adequate tools for policing anticompetitive behavior.

Yet, government agencies often hold significant discretion over regulatory enforcement, and it has been argued that stronger enforcement of existing statutes could have reined in anti-competitive forces. Disentangling the effects of existing statutes from the efforts exerted to enforce them is quite difficult because enforcement efforts typically are not easy to measure or even observe.

We study an extraordinary episode from the Gilded Age, when the enforcement of antitrust statutes suddenly was strengthened, and we show that political discretion over antitrust enforcement can have meaningful consequences for the economy. No period in American history witnessed a more-significant consolidation of economic activity into large firms than the Great Merger wave of 1895-1904.

William McKinley, who was elected president in 1896, generally was friendly toward business interests and did not attempt to use the Sherman Antitrust Act of 1890 to challenge these mergers. His assassination by an anarchist in September 1901 presents a unique opportunity to study the effects of a change in the president's attitude toward enforcement of antitrust laws at a time when all other institutions remained unchanged. In contrast to McKinley, Theodore Roosevelt, who succeeded him as president, openly was critical of big business. The sudden accession of a well-known progressive reformer to the presidency likely shifted expectations regarding the aggressiveness with which antitrust laws would be enforced.

We use the stock market's reaction to the McKinley assassination to measure the expected impact of this change in the president's preference for antitrust enforcement. The quasi-random nature of the assassination enables us to estimate the market's reaction in a way that election outcomes, which generally are well anticipated, do not. The assassination did not coincide with any other major changes; the composition of Congress, the courts, and even the attorney general remained unchanged, but a...