Free-Rider Problem

Conceptual Overview

The analysis of the FRP is rooted in the analysis of collectivities and the dilemmas they face when attempting to generate enough commitment and participation from their members. Throughout history, authors have complained of the costly effort needed to keep collectivities together and encourage equal participation among members. Personalities such as Aristotle, Hume, Adam Smith, John Stuart Mill, Pareto, and even Marx have made relevant contributions to the topic

For some, the main explanation is that the self-interest is the point of departure of politics, at any level. Machiavelli and Hobbes clearly made this assertion, creating a very influential definition of human nature: It is rational to be self-interested, since self-interest is the base for individual calculation. For Hobbes, individuals are self-determinate, selfish, and looking for satisfaction. This is the basis for the existence of a monarch or a leviathan state that limits the passions of its subjects through a legal frame or regulation.

The main problem is the discovery that, under certain circumstances, individuals selfishly looking for their own objectives will produce suboptimal results when working collectively. The market, given its size and multiple exchanges, produces a structure that, in theory at least, is able to produce collective Pareto optimum levels through the actions of ostensibly selfish individuals. However, when the exchange implies collective cooperation, the same selfishness might produce a counterintuitive effect: individuals facing collective incentives that, contradictorily, push them to act against the collective objective. The FRP is an enormous dilemma for those theories that depend [Page 526]upon individuals rationally calculating steps to achieve objectives based upon a selfish, individualbased, analysis. The FRP implies that, under certain circumstances, a rational person can produce irrational results, at least in collective situations.

Mancur Olson's Logic of the Collective Action is the best known seminal document on the FRP. Olson's argument starts by implying that an organization basically produces collective goods that cannot be denied to its members. When this happens, individuals have pervasive incentives not to participate. The larger the organization is, the bigger the possibility that individuals will defect due to an unfavorable calculation of the cost and benefits of participation. In other words, the bigger the organization, the harder it is to supervise equal participation among individuals. According to Olson, small groups are better prepared to monitor its members by generating easy and positive incentives for cooperation. For example, the benefit of a free ride is diminished by the increased cost associated with the high possibility that one will be observed cheating and then punished. For big groups to exist, they must decrease the possibility of employees cheating or free riding through the creation of specific incentives for cooperation. For Olson, these solutions are called the n-group and selective incentives.

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