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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
    DOI: 10.1111/j.1430-9134.1992.00037.x
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    References listed on IDEAS

    as
    1. Bebchuk, Lucian Arye, 1989. "Takeover Bids below the Expected Value of Minority Shares," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(2), pages 171-184, June.
    2. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    3. Chamberlain, Gary & Rothschild, Michael, 1981. "A note on the probability of casting a decisive vote," Journal of Economic Theory, Elsevier, vol. 25(1), pages 152-162, August.
    4. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
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