Free Riding
Free riding occurs when individuals or entities benefit from resources, goods, or services without paying for them, relying on others to bear the costs. This behavior is common in public goods, like national defense, where non-payers cannot be excluded from enjoying the benefits. In financial markets, free riding can refer to trading without adequate funds, relying on unsettled trades to cover obligations. Free riding can lead to inefficiencies and reduced incentives for others to contribute.
Example
An investor buys shares using proceeds from a sale that has not yet settled, engaging in free riding, which is prohibited by most trading regulations to prevent market abuse.
Key points
• Involves benefiting from goods or services without contributing to their cost.
• Common in public goods and financial markets.
• Creates inefficiencies and reduces incentives for others to participate or pay.
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