Renter Free Rider Problem
How much of a problem is the renter free rider problem? If you’ve never heard of the free rider problem, it affects many aspects of pricing issues and partially derives from many government actions. Forbearance partially falls within the free rider definition, but for the most part the end game separates it from a true free rider problem. Forbearance end may be foreclosure, eviction, loss of equity, and a credit score blemish for years if not brought current. So there is a cost to be paid. The renter free rider problem differs. Can renter free riders turn into home buyers?
How should one think about free riders? The free rider problem shifts the burden on a shared resource created by its use or overuse. Free riders use a resource, but don’t pay their fair share for it or don’t pay anything at all. A free rider doesn’t contribute to a collective resource since the free rider can enjoy its benefits even without contributing. No incentive exists to contribute. As a consequence, the producer of the resource cannot be sufficiently compensated. The resource must be subsidized in some other way or it will not be created.
In theory, every road should be a toll road paid for only by those who use it. But that’s not practical. So free riders use a road for free even though others pay for it. As a result, other forms of payment for a collective resource develop. In this manner, the payments get pooled for mutual good so all pay and all free ride to some extent. Car insurance companies developed pay by mileage car insurance based somewhat on free rider principles. Those who use, pay.
Free Rider Examples
The internet is a good example. Websites, like mywinningmortgage.com take time and money to develop and update. News sites come to mind as the forefront of the battle. Subscriptions pay for much of the content, but making everything subscription based decreases the level of activity needed. Hence, content, some at least, comes for free. Make all content free and no revenue comes in. Advertising has to come in to play for eyeballs.
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Another example may be a commune or communal farm. In the theory of communism or socialism, work is provided by each according to its ability and results are provided to each according to need. In practice, few individuals end up doing the majority of work to produce while many others slack and receive. As a side note, those producing usually resent this outcome.
Free Riders and Politics
Politically correct or politically incorrect, thereafter the communist/socialist ideal morphs into an authoritarian system. Slackers now receive assignments and forced work. Resources move from being divided according to need to division according to political support. Patronage is not unique to socialism or communism in that authoritarians give spoils to political supporters. In democratic or capitalist countries, the same happens as government grows in size and influence. The free rider issues crosses all ideologies.
Early Adopters
While not exactly a free rider issue, the early adopter issue has parallels. Think of a new technology invention like the cell phone just coming on the market. Technology usually causes prices to decrease over time, unlike the cost of groceries, rent or other items. A new cell phone, cell towers and ancillary infrastructure cost large sums to implement. The early adopters pay a very high price for the phone as well as the service. Late adopters (almost like free riders) get the benefit of a lower price by having much of the upfront costs paid for by others. Late adopters benefited to some extent as a free rider on the cost curve where others paid the cost to make a product cheaper for them.
Renter Free Rider Problem
With the moratorium on evictions for non-payment of rent in effect, what incentive does a renter have to pay rent? If a renter earns sufficient income, it may elect not to pay, just bank the rent not paid each month. Perhaps this results in a ding to a credit score. The trade-off may be well worth it. Morality and a sense of right may keep a renter with sufficient income paying every month. The moratorium nobly sought to help those who lost income due to the pandemic. But others can ride along for free. Many renters in areas outside of perhaps New York City or a few other areas move frequently anyway. A free rider might skip a year or more of rent payments and just move to a new apartment.
Rental Assistance
States have tens of billions of dollars in rental assistance available from the federal relief bills signed into law in December 2020 and March 2021. Tenants behind on rent because of a Covid-related job loss or reduction in hours can apply for programs in their city or state. Mmore details on the eligibility requirements can be found outlined here. Or, tenants can have their landlords apply for them. The relief typically will be paid directly to the landlord. But the tenant has to qualify through a job loss or other adverse income event.
Do free riders meet the definition of eligibility? Likely not. But, free riders likely may receive assistance anyway. Government programs and assistance programs have very large incidences of mismanagement, fraud and poor administration. It’s not the states’ money anyway, so why not give it out if it can’t be used elsewhere? Landlords are owed more than $50 billion in past due rent. How much will be paid to the landlords and how much will be retained by tenants? If retained by tenants, will those free rider tenants have saved enough for a down payment?