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- Title
Investment in the Common Good: Free Rider Effect and the Stability of Mixed Strategy Equilibria.
- Authors
Kim, Youngsoo; Kwon, H. Dharma
- 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. In the game of investment in the common good, the free rider problem can delay the stakeholders' actions in the form of a mixed strategy equilibrium. However, it has been recently shown that the commonly known form of mixed strategy equilibria of the stochastic war of attrition is destabilized by even the slightest degree of asymmetry between the players. Such extreme instability is contrary to the widely accepted notion that a mixed strategy equilibrium is the hallmark of the war of attrition. Motivated by this quandary, we search for a mixed strategy equilibrium in a stochastic game of investment in the common good. Our results show that, despite asymmetry, a mixed strategy equilibrium exists if the model takes into account the repeated investment opportunities. This class of mixed strategy equilibria disappear only if the asymmetry is sufficiently high. Because the mixed strategy equilibrium is less efficient than pure strategy equilibria, it behooves policy makers to prevent it by promoting a sufficiently high degree of asymmetry between the stakeholders through, for example, asymmetric subsidy. Funding: Y. Kim gratefully acknowledges the financial support from the ISM department in the Culverhouse College of Business. Supplemental Material: The e-companion is available at https://doi.org/10.1287/opre.2022.2371.
- Subjects
BEST Buy Co. Inc.; NASH equilibrium; FREE-rider problem; COMMON good; SOCIAL responsibility of business; BUSINESS schools; AUDITING; VARIABLE annuities; TAXI service
- Publication
Operations Research, 2024, Vol 72, Issue 2, p684
- ISSN
0030-364X
- Publication type
Article
- DOI
10.1287/opre.2022.2371