Free Riding in Networks

TL;DR

This paper analyzes free riding in networked public goods, deriving conditions for equilibrium, examining inequality effects, and proposing policies like redistribution and personalized pricing to improve welfare.

Contribution

It provides a theoretical framework for understanding free riding in networks and offers policy solutions to enhance social welfare and efficiency.

Findings

Large contributors tend to link to each other

Free riding reduces inequality only in initially low-inequality networks

Richer players benefit more in high-inequality networks

Abstract

Players allocate their budget to links, a local public good and a private good. A player links to free ride on others' public good provision. We derive sufficient conditions for the existence of a Nash equilibrium. In equilibrium, large contributors link to each other, while others link to them. Poorer players can be larger contributors if linking costs are sufficiently high. In large societies, free riding reduces inequality only in networks in which it is initially low; otherwise, richer players benefit more, as they can afford more links. Finally, we study the policy implications, deriving income redistribution that increases welfare and personalized prices that implement the efficient solution.