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These snake oil salesmen and snake charmers the corporate executives are allowed by shareholders to loot the company providing they generate consistent capital gains to their masters by provoking persistent interest and excitement around the business. Shareholders, in other words, do not behave as owners of the firm they behave as free-riders.
The theory fails to predict important phenomena such as "strong reciprocity" the propensity to "irrationally" sacrifice resources to reward forthcoming collaborators and punish free-riders. Irritatingly for economists, people change their preferences mysteriously and irrationally. This is called "preference reversals".
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