The free-rider problem, when referring to monitoring of firms' performance, often results in
A)ineffective monitoring by the shareholders.
B)monitoring being delegated by shareholders toboards of directors.
C)no monitoring by a large number of small individual investors.
D)ineffective monitoring by the shareholders, monitoring being delegated by shareholders to boards of directors, and no monitoring by a large number of small individual investors.

Question

Quizplus · Accepted Answer

The free-rider problem occurs when individuals or firms benefiting from a public good do not pay for it or contribute to its production. In the context of monitoring firms' performance, small individual investors may not have enough incentive to participate in monitoring if they believe others will do it for them. This can result in ineffective monitoring by shareholders. To address this, shareholders often delegate monitoring to boards of directors, who may not always act in the best interest of the shareholders. Therefore, the free-rider problem can lead to both ineffective monitoring by shareholders and monitoring being delegated to potentially biased boards of directors.

The Free-Rider Problem, When Referring to Monitoring of Firms' Performance