Free-rider problem in the case of monitoring results in:
I. ineffective monitoring by the shareholders
II. monitoring being delegated
III. no monitoring by a large number of small individual investors
A) I only
B) II only
C) III only
D) I, II and III

Question

Quizplus · Accepted Answer

The free-rider problem occurs when individuals who benefit from a public good (in this case, effective monitoring) do not contribute to its production. Ineffective monitoring by the shareholders may occur because some shareholders may feel that their individual contribution to monitoring will not make a difference, and therefore they choose to free-ride on the efforts of others. Delegation of monitoring to a third party (such as a board of directors or an external audit firm) may also create a free-rider problem if shareholders expect others to oversee the monitors. Finally, a large number of small individual investors may not have enough influence to affect monitoring decisions, leading them to free-ride on the efforts of larger shareholders. Therefore, all three options (I, II, and III) correspond to the free-rider problem.

Free-Rider Problem in the Case of Monitoring Results In