Individual incentives in the supply of public inputs

Abstract

The free-rider hypothesis states that, in the decision on public-goods and private-good provision, individual incentives are such that public goods will tend to be undersupplied. This paper examines the free-rider argument as it applies to public intermediate goods. It is shown that, unlike in a static model, in a dynamic world there may exist incentives for firms to act cooperatively in determining the supply of public intermediate goods. In a dynamic context there is a cost to free riding: what one firm does now affects what others will do in the future. Provided future profits are not discounted too heavily, the free-rider problem may disappear when a time dimension is added to the theory.