Free-rider problem

This article is about an economic and political phenomenon. For the stock market term, see Free riding. For free rides on freight trains, see Freighthopping. For free rides on any type of vehicle, see Stowaway.

In economics, collective bargaining, psychology and political science, the free rider problem occurs when individuals or organizations consume more than their fair share of a resource, or shoulder less than a fair share of its costs. Free riding is usually considered an economic problem only when it leads to the non-production or under-production of a public good (and thus to Pareto inefficiency), or when it leads to excessive use of a common property resource.

The free rider problem has deep roots in general bargaining and incentive compatibility. When bargaining, participants often bid less than they are prepared to pay, in order to improve their own position. This creates problems because it is impossible to discover the participants' true demand payoff curves, and a likely result is inefficient allocation of resources.

Free riders are resented because they are thought to be taking more than their fair share of a resource, failing to pay their fair share of the cost, and treating others as suckers. They cause teams to perform less well because other members become less willing to contribute when they think that one or more members are free riding.

Examples

In the context of labor unions, the free rider problem occurs when an employee who pays no union dues or agency shop fees nonetheless benefits from union representation. In the context of public transit, a free rider is someone who literally rides for free while other passengers pay their fares.

A hypothetical example involving businesses is: suppose that a street with 25 storefront businesses suffers from a litter problem. A weekly street-cleaning service would cost $2,500 annually. Some business owners may refuse to pay, anticipating that the service will be undertaken regardless. If enough owners refuse to pay, the service cannot be hired; an example of market failure. A possible solution is to gather the 25 participants and make them behave like one customer, so the decision is reduced from 25 independent decisions to one. A vote can be taken, but if the answer is yes, everyone will be forced to pay regardless of their individual support. Deciding how to split the cost raises complications. The utility and value of the service may vary for each owner. An even split ($100 each) may not be feasible.

See also

• Adverse selection
• Assurance contract
• Canadians of convenience
• Forced rider problem
• Inequity aversion
• Moral hazard
• Parasitism (social offense)
• There ain't no such thing as a free lunch
• Tragedy of the commons

References

• Cornes, Richard (1986). The Theory of Externalities, Public Goods and Club Goods. New York: Cambridge University Press. ISBN 052130184X. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
• Venugopal, Joshi (2005). "Drug imports: the free-rider paradox". Express Pharma Pulse. 11 (9): 8. This article refers to the free-rider problem in global pharmaceutical research.
• Antonin Scalia's dissenting opinion in Lehnert v. Ferris Faculty Association, 500 U.S. 507 (1991).

External links

• Stanford Encyclopedia of Philosophy entry