The Royal Swedish Academy of Sciences has awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2016 to: Oliver Hart Harvard University, Cambridge, MA, USA Bengt Holmström Massachusetts Institute of Technology, Cambridge, MA, USA for their contributions to contract theory.
You can view Bengt Holmstrom and Barry Nalebuff’s paper, “To The Raider Goes The Surplus? A Reexamination of the Free-Rider Problem,” in the Spring 1992 issue of JEMS.
10 October, 2016
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.