In Business, what is a Free Rider?

A free rider is a person or entity who benefits from something without contributing as much as other people. The classic example and origin of the term is a free rider on public transportation. People who hop on a bus without paying the fare benefit from the bus paid for by other riders, as well as tax levies that raise money for transportation. If enough people evade the fares, the bus becomes unsustainable to run.

Free riders either consume more of something than others or they contribute less to it, and sometimes both. There are a number of examples of free riders in the business community as a result of the fact that businesses often band together to achieve common goals and even businesses that do not participate receive benefits. A classic example plays out in the downtown districts of many small towns. Business owners form collectives and invest in measures to make downtown more appealing, and businesses that do not contribute still benefit from the increased foot traffic.

When businesses collectively agree to support an endeavor, there is always a risk that a free rider will show up. Structuring endeavors to provide some room for free riders can help businesses manage the free rider problem, but businesses often feel resentful about paying for someone else to benefit. Another example of the free rider problem turns up in patent law, where major companies pay large licenses to other companies to in order to prevent them from enforcing patents against them, and then smaller companies benefit from the lack of enforcement.

This issue can also come up in union workplaces. Workers who belong to a union contribute dues, as well as time for union meetings and votes. In return, the union negotiates better wages and other benefits for them. Workers who are not in the union receive these benefits without having to contribute. A number of tactics are used in union workplaces to discourage free riders, as unions rely on contributions from as many people as possible in order to function.

Resentment about free riders can also play out in social policy. Many nations have systems of taxation with different brackets that are designed to promote fairness by relieving tax burdens on low income members of society. Wealthy members of society may resent the fact that they pay higher taxes and are less likely to use the services paid for with those taxes, arguing that low income people are free riders. However, in social policy as in business, the net good of apparent inequality sometimes outweighs the costs to people who are contributing slightly more.