Strategy Economics Aug 1, 2016

A Clever Strat­e­gy to Com­bat Free Riding

In any col­lab­o­ra­tion, the temp­ta­tion to slack off is strong.

Yevgenia Nayberg

Based on the research of

Jakša Cvitanić

George Georgiadis

From bring­ing a med­ical device to mar­ket to cut­ting glob­al emis­sions, few tru­ly com­plex chal­lenges can be solved by a lone indi­vid­ual work­ing late into the night.

But col­lab­o­ra­tions also have their down­sides, includ­ing one that econ­o­mists have long tried to erad­i­cate: the free-rid­er prob­lem. Any time you have two or more peo­ple work­ing togeth­er, each act­ing in his or her own best inter­est, they behave less effi­cient­ly than if they were work­ing alone,” says George Geor­giadis, an assis­tant pro­fes­sor of strat­e­gy at the Kel­logg School.

This is because what is best for the group tends to dif­fer from what is best for each of us. Indi­vid­u­al­ly, we want to enjoy the fruits of our team’s labor, but we aren’t as keen to incur the costs. In oth­er words, as Geor­giadis puts it, because I only care about my ben­e­fits and costs — that is, I do not inter­nal­ize the ben­e­fits of my labor to the oth­er team mem­bers — I am going to do less work.”

In a new math­e­mat­i­cal mod­el he devel­oped with col­league Jakša Cvi­tanić, Geor­giadis pro­pos­es a clever way of get­ting around the free-rid­er prob­lem, par­tic­u­lar­ly for some­what involved col­lab­o­ra­tions that unfold over time. The researchers’ solu­tion can be used in busi­ness col­lab­o­ra­tions to ensure that teams work togeth­er effi­cient­ly. But it also offers a way to com­bat thorny polit­i­cal issues involv­ing the free-rid­er prob­lem, such as how coun­tries share the respon­si­bil­i­ty of curb­ing green­house emis­sions or pre­vent­ing the over­har­vest­ing of resources.

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You have inef­fi­cien­cies when indi­vid­u­als act in their own inter­est, to the detri­ment of every­one,” says Geor­giadis, and the objec­tive of our arti­cle is to design a mech­a­nism that erad­i­cates those inefficiencies.”

A Mod­el of the Free-Rid­er Problem

At its heart, the dri­ve to min­i­mize our own effort — the source of the free-rid­er prob­lem — is deeply ingrained in us.

When we tack­le an incline on a tread­mill, for instance, our brains auto­mat­i­cal­ly adjust our pos­ture and gait to expend the least amount of phys­i­cal ener­gy pos­si­ble on the climb.

The same idea extends to our jobs. If we know we can get away with putting forth less effort, we will be tempt­ed to take advan­tage of the sit­u­a­tion to con­serve men­tal energy.

Geor­giadis and Cvi­tanić sus­pect­ed that putting some­thing tan­gi­ble on the line — such as cash — might encour­age every­one to behave in ways that are effi­cient for the whole group, rather than just for themselves.

They for­mu­lat­ed a the­o­ret­i­cal sit­u­a­tion in which every­one work­ing on a long-term project con­tributes incre­men­tal fees to a third par­ty until the entire project is com­plete. Then, and only then, are lump sum pay­ments returned to the con­trib­u­tors, in pre­spec­i­fied amounts. So long as the group works togeth­er effi­cient­ly, mem­bers will each get back what they con­tributed, plus interest.

The accu­mu­lat­ing fees act as a tax or penal­ty for free­load­ing, forc­ing indi­vid­ual team­mates to inter­nal­ize the costs of the group’s inef­fi­cien­cies. More­over, by giv­ing each agent a large lump-sum pay­ment when the goal is reached, her bot­tom line is essen­tial­ly mag­ni­fied, and thus she has incen­tives to choose actions that are best not only for her, but also for the group as a whole,” Geor­giadis says.

The exact amount that team­mates con­tribute might dif­fer from one indi­vid­ual to the next, based on fac­tors like the size of their role or their pro­duc­tiv­i­ty. But impor­tant­ly, it is cal­cu­lat­ed to wipe out any per­son­al incen­tive to work at a rate that is inef­fi­cient for the group. Cvi­tanić, a pro­fes­sor of math­e­mat­i­cal finance at Cal­tech, sums it up this way: The size of the penal­ty for each indi­vid­ual should be such that every­one feels every­one else’s pain.”

My temp­ta­tion to free ride, to skip an hour of work, when we’re close to com­ple­tion is big, because I’m work­ing real­ly hard.”

And everyone’s con­tri­bu­tion increas­es as the project nears com­ple­tion. This, says Geor­giadis, is because the temp­ta­tion to free­load increas­es as you approach the fin­ish line.

The basic idea is that the clos­er you are to com­ple­tion, the big­ger the stakes are and the big­ger the incen­tives of the dif­fer­ent par­ties to free ride. There­fore, we need big­ger pay­ments to kill those free rid­ing incen­tives,” says Georgiadis.

Why would the incen­tives to loaf increase as the project nears com­ple­tion? With the end in sight, every­one is work­ing hard­er — which makes the prospect of an after­noon off even more tan­ta­liz­ing. My temp­ta­tion to free ride, to skip an hour of work, when we’re close to com­ple­tion is big, because I’m work­ing real­ly hard,” says Georgiadis.

Free Rid­ing in a Start­up Environment

Inter­est­ing­ly, the researchers argue that their mod­el cap­tures the incen­tives struc­ture at many star­tups. Entre­pre­neurs devote time to their start­up earn­ing zero or below mar­ket wages. Each day’s work, then, rep­re­sents lost wages paid toward the business’s future launch, at which point pre­spec­i­fied shares of the busi­ness will be paid out, but only if the busi­ness is successful.

More­over, if one assumes that the entre­pre­neurs become more expe­ri­enced as the start­up grows, they are essen­tial­ly fore­go­ing ever larg­er pay — thus effec­tive­ly mak­ing ever larg­er pay­ments’ — until the goal is reached,” says Georgiadis.

Yet, the mod­el can offer insights into com­bat­ting the free-rid­er prob­lem in oth­er con­texts as well — par­tic­u­lar­ly in sit­u­a­tions that unfold over time, giv­ing each par­ty mul­ti­ple oppor­tu­ni­ties to respond to the ever-chang­ing actions of others.

The objec­tive may be to bring a busi­ness project to fruition,” Geor­giadis says, or it could be to raise funds for a noble cause. Or to lim­it pol­lu­tion, or cli­mate change, or the over­har­vest­ing of a com­mon resource. Our frame­work speaks to all these applications.”

Free Rid­ing and Glob­al Warming

Take cli­mate change. All coun­tries ben­e­fit from reduc­tions in green­house gas­es, even if they do not reduce any of their own pol­lu­tion. But for indi­vid­ual nations, reduc­ing pol­lu­tion incurs a finan­cial cost, because they have to lim­it indus­tri­al pro­duc­tion or make expen­sive invest­ments in clean­er technologies.

So, the temp­ta­tion would be to let oth­er coun­tries car­ry the bur­den and keep on pro­duc­ing pol­lu­tion as usu­al — or even accel­er­ate pro­duc­tion, Geor­giadis says.

Apply­ing the researchers’ mod­el sug­gests a way for­ward. Coun­tries could agree to con­tribute penal­ty pay­ments” to a trust­ed third par­ty until the goal is achieved.

These penal­ties would be cus­tom-tai­lored to each nation. The size of the penal­ty would depend on how far away from the goal the mem­ber coun­tries are as a whole, and on how cost­ly it is for indi­vid­ual coun­tries to fol­low the agree­ment,” Cvi­tanić says. Thus, the coun­tries that feel less pain in fol­low­ing the agree­ment would have to con­tribute more.”

Or, to see how the mod­el can be adapt­ed to a range of sit­u­a­tions, con­sid­er the prob­lem of overfishing.

I fish in a lake, and I get to sell the fish in a local mar­ket,” says Geor­giadis. But, of course, if every­one takes too much fish, the pop­u­la­tion crash­es. A way to make indi­vid­ual fish­ing boats take everyone’s liveli­hood into account might be for reg­u­la­tors to offer each a mon­e­tary sub­sidy so long as the fish pop­u­la­tion remains stable.

In oth­er words, instead of indi­vid­u­als mak­ing a size­able penal­ty pay­ment, in this sce­nario they would con­tribute a neg­a­tive penal­ty pay­ment. That’s what a sub­sidy is,” says Geor­giadis. So every­thing is essen­tial­ly flipped upside down.”

Regard­less of pre­cise­ly how the mod­el is imple­ment­ed in prac­tice, Geor­giadis sees glob­al­iza­tion as mak­ing the free-rid­er prob­lem more impor­tant than ever to solve.

Maybe fifty years ago, a busi­ness would have just a few employ­ees,” he says. But with com­pa­nies — and polit­i­cal prob­lems — grow­ing in scale, mak­ing col­lab­o­ra­tions as effi­cient as pos­si­ble is crit­i­cal for improv­ing everyone’s well-being. And who doesn’t want that?

About the Writer

Pam Frost Gorder is a university science writer, blogger, and freelancer.

About the Research

Cvitanić, Jakša, and George Georgiadis. Forthcoming. “Achieving Efficiency in Dynamic Contribution Games.”  American Economic Journal: Microeconomics.

Read the original

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