Free Rider Games

Most people like material goods but prefer not to work for them. Many humans besides me are both lazy and greedy. This dangerous combination creates trouble when people work in teams. Everyone benefits when a team succeeds, but most everyone would prefer if the team succeeded based on the hard work of others. People living together often are supposed to work as a team.

No one likes cleaning bathrooms, but most people like their bathrooms to be clean. When several people share a bathroom, a free rider game is consequently created. As its name suggests, free rider games manifest themselves when someone attempts to free ride on another’s efforts. There are three outcomes to the bathroom free rider game:

1. Everyone shares the work.

2. One person gives in and does all the cleaning.

3. The sanitary conditions in the bathroom steadily deteriorate.

As of this writing, my fianc e is concerned that when we get married and live together I will have the advantage in this game since I’m vastly more willing to tolerate outcome (3) than she is. Of course, dirty bathrooms are far from the worst consequences that arise from free rider games.

Imagine life on some perfectly egalitarian agricultural commune where all the food produced is equally divided up among members. Let’s say there are 10,000 people, and each tills a small share of land. When the harvest comes, all the food is brought to the center of town and distributed evenly. How much should each farmer work? The more you work, the more food everyone has. If you grow, say 10,000 carrots, however, you get to keep only one of them. True, you will also get some carrots that other people grow. Under the rules of egalitarianism, though, you get the carrots other people grow regardless of whether you grow any yourself. If you live to serve the collective good, then you will produce as much as possible. Outside of a socialist fantasyland, however, people care mostly about themselves and their families. The cost to you of growing 10,000 carrots will be the large amount of effort their production requires. The benefit to you is only one carrot. A self-interested person would probably not go to the effort of growing 10,000 carrots just to keep one.

I suspect some readers are thinking that this analysis can’t be right because if everyone on the commune thought this way, no one would produce anything, resulting in mass starvation. Actually, when collective agriculture was tried in China under Mao and the Soviet Empire under Stalin, the result was mass starvation. Was this just because the farmers did not realize the game they were playing and thus didn’t grow enough food? Actually, the economic system destined them to die.

Imagine you were one of these farmers and realized that if everyone were lazy, many (possibly even you) would perish. What could you do? The best option, actually, would be to emigrate to America, but let’s stay within the context of this game. What if you decided to grow lots of carrots? Your efforts would increase your food allotment by only a trivial amount. It would also make you more tired, so you would probably now be among the first to die. Your best chance at survival would lie in working as little as possible while praying that you survive to play another game. Of course, since everyone will probably follow this strategy, little food will be produced. If only Mao and Stalin had understood game theory, millions of lives could have been saved!

Underlying the theory of communism is the assumption that people will work for the common good, not their self-interest. Communists like Mao and Stalin presumably believed that a worker would be at least as motivated to work for the common good as he would to work to fill his own stomach. Since most people primarily care about themselves and their families, however, communism failed.

If you’re not sure whether you’re self-interested, then take the following test, which is somewhat adapted from Adam Smith’s The Wealth of Nations. Imagine that two bad things happen today: First, there is a devastating earthquake in a country you have previously never heard of. One hundred thousand people die. Second, while cooking, you cut off the tip of your pinky finger. A close friend calls you tonight and asks, “How has your day been?” You reply, “This day has been terrible, one of the worst in my life.” You then proceed to explain to your friend why your day has been so bad. What are you most likely to mention to your friend, the earthquake or your finger? If you would be more likely to discuss your finger, then you care more about the tip of your pinky finger than you do about 100,000 fellow human beings. This doesn’t make you a bad person, just one who is primarily focused on what is in your, and perhaps your family’s, self-interest. As the comedian Mel Brooks once said, “Tragedy is [if] I cut my finger. Comedy is if you fall into an open manhole and die.”^[4]

Communism caused economic ruin because it failed to take into account that most people are self-interested. Companies too can err when they don’t consider how self-interest motivates workers.

Firms often try to motivate workers by giving them stock in the company. The logic behind employee stock ownership programs is that if the employee owns a piece of the company, he will get more of the rewards of his labor. Game theory, however, would predict that, at least for large companies, employee stockholding would fail to motivate workers for the same reason that communist communes failed. In a large company each employee could get only a tiny part of the whole company. Consider a worker whose stockholdings give her 1/1,000,000 of the company. If she improves profits by $1 million, she gets only a dollar of benefit. Since $1 is unlikely to motivate anyone, her stock ownership will not influence her behavior. It’s true that owning stock will cause the employee to care more about the company’s profits; it just won’t cause her to take any additional actions to actually increase these profits.^[5] Perhaps owning shares in their company gives workers some warm and fuzzy feeling that somehow transforms them into better employees. Warm and fuzzy feelings, however, are beyond the scope of game theory.

A far more effective way to motivate workers is to pay them based on their own performance. When your salary depends on the performance of the whole company, you have little incentive to work as long as what you do does not significantly affect company profits. In contrast, when you are paid based on your own contributions, you have a tremendous incentive to work hard.

While stock ownership is not an effective way to motivate most employees, it can motivate the chief executive officer. A company’s CEO has a tremendous influence on his company’s fortunes. Consequently, giving him a slice of the company (and thus a claim on the company’s future profits) will cause him to care a lot about the fortunes of the company. For example, most businesspeople don’t like to fire employees. If a CEO knows, however, that firing 10 percent of his workforce will increase the company’s stock price, then owning a lot of that stock would make her more willing to order the terminations. In contrast, if the CEO doesn’t have a large position in the company, it might not be in her self-interest to get rid of the people just to help some outside shareholders.

Free Rider Problems Between Companies

Different companies that try working together can face free rider problems. Imagine several companies have agreed to conduct joint research and development. They agree to fully share the patent rights to anything developed. Each company should try to get the others to do all of the work and pay all of the expenses. Of course, if all the companies understand game theory, then they might be able to figure out some way of overcoming the free rider problems. The companies could specify in advance what everyone will do and contractually agree to penalties if one company doesn’t accomplish its share. This free rider problem might disappear if the companies expect to work on future projects together. Each company might avoid taking advantage of its collaborators on this project, so they might have the opportunity to work together on future ventures.

Free Rider Problems with Teams

Companies often can’t avoid free rider problems among their employees because teams can accomplish many tasks better than individuals. Companies often assign a group of employees to work on a joint project. Whenever they do this, however, there is always the danger that some employees will free ride. The free rider problem doesn’t mean that joint tasks shouldn’t be given, only that managers should recognize that free rider problems will manifest when people work in teams. Whenever possible, managers should try to assess individual members of the team so that no one person can benefit from laziness.

In a free rider game the key to winning is to be as lazy as possible and hope other people will take up the slack. When creating working environments involving teamwork, the key to success is recognizing free rider problems and doing your best to minimize them by punishing laziness and rewarding hard work.

^[4]Salon (July 16, 2002).

^[5]Employee stock ownership also unnecessarily increases a worker’s risk. If her company goes bankrupt, she would lose not only her job but also much of her savings. From the point of view of risk allocation, an employee would be far better off owning stock in her company’s main competitor because if the competitor beats her company, she would (probably) have more limited short-term career options but greater financial wealth. Many employees at Enron learned this lesson when Enron’s company’s stock price plummeted after the employees had invested most of their retirement savings in Enron stock.