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To the Raider Goes the Surplus? A Reexamination of the Free-Rider Problem

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  • Holmstrom, Bengt
  • Nalebuff, Barry

Abstract

This paper reexamines Grossman and Hart's (1980) insight into how the free-rider problem excludes an external raider from capturing the increase in value it brings to a firm. The inability of the raider to capture any of the surplus depends critically on the assumption of equal and indivisible shareholdings--the one-share-per-shareholder model. In contrast, we show that once shareholdings are large and potentially unequal, a raider may capture a significant part of the increase in value. Specifically, the free-rider problem does not prevent the takeover process when shareholdings are divisible. Copyright 1992 by MIT Press.

Suggested Citation

  • Holmstrom, Bengt & Nalebuff, Barry, 1992. "To the Raider Goes the Surplus? A Reexamination of the Free-Rider Problem," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 37-62, Spring.
  • Handle: RePEc:bla:jemstr:v:1:y:1992:i:1:p:37-62
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