Equilibrium corporate ownership structure with free-riding

Abstract

Management control by shareholders is a public good. In the Nash equilibrium only the largest shareholder spends effort on management control. This is an incentive not to be the largest shareholder, and this incentive determines some properties of equilibrium corporate ownership structure. In particular, a perfect market with endogenous shareholdings and Nash behavior cannot overcome the underprovision problem implied by the public good problem, even if any diversification incentive for risk sharing is absent.