Investment in the Common Good: Free Rider Effect and the Stability of Mixed Strategy Equilibria

Abstract

The free rider problem is widely observed in investments in the common good. For example, if Best Buy offers corporate social responsibility (CSR) programs, such as recycling, tech training, and supplier audit, at its own expense, other firms in the industry can benefit from these programs at no cost (i.e., they become the free riders). Such a free rider effect often manifests itself as a mixed strategy equilibrium, in which potential investors unnecessarily delay their investments. The article “Investment in the common good: Free rider effect and the stability of mixed strategy equilibria” finds that recurring investment opportunities can be a major driver of delays in investment in the common good. It also shows that sufficient heterogeneity in investment cost among potential investors can alleviate the free rider effect. Therefore, the policy makers may try to facilitate investments in public goods (e.g., CSR activities) through some form of selective benefits to potential investors.