Overbidding in Takeover Contests

Within the context of takeovers this paper shows that in private auctions the optimal individually rational strategy for a bidder with partial ownership of the item is to overbid, i.e. to bid more than his valuation. This strategy can lead to i) an inefficient outcome, and ii) the winning bidder making a net loss. the result remains valid in an extended framework where bidders have to search prior to the auction. Further, the overbidding result implies that the presence of a large shareholder mitigates the free-rider problem of extracting the private gains from a single bidder. 

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