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

Bengt Holmstrom () and Barry Nalebuff

Journal of Economics & Management Strategy, 1992, vol. 1, issue 1, 37-62

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.

Date: 1992
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