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01 July 2004
 Julie Meyer This past month has heralded a procession of historic events that could only lead those watching to think about the benefits that they have today thanks to living in a free society. A couple of examples come to mind. The 60th anniversary of D-Day recently passed, and the men who landed in Normandy fighting to crush Nazism have been called the greatest generation. We owe our freedom today to them and their sacrifice. Reagan's tax cuts of the early 1980s have widely been recognised as having ushered in two decades of unprecedented prosperity. Clinton and Bush were recipients of the benefits of Reagan's vision. We've lived in more or less peaceful times in the US and Western Europe over the past two decades. Contrast that with the struggle of those in the Middle East, who are having to fight for their freedom, and ask yourself whether you aren't a free rider of some of the biggest sacrifices and most courageous actions of the past century. In additional to historical examples of the 'free rider problem', leading economists have studied this phenomenon. Dr Jean-Jacques Laffont, an economist known for developing mathematical models to estimate what something is worth in situations of deep uncertainty, died of cancer in Toulouse, France last month at the age of 57. In 17 books and 200 articles, Dr Laffont brought an elegant simplicity to the branch of economics known as information theory, particularly the study of incentives in contracts where one party has more knowledge than the other, or different knowledge. He particularly focused on the free rider problem, referring to those who benefit from a particular action or policy but escape having to pay for it. He focused on creating contracts to deal with this, sometimes called 'the problem of the commons'. In essence, the issue is that people can share a benefit like cleaner air by having someone else pay to clean it. Reagan applied one of the principles that was demonstrated by Laffont regarding taxation. If you have a factory upstream from a city, is it better to tax the factory for polluting the river and then share the benefits with the citizens, or to incentivise the factory to diminish its pollution level by changing machinery or processes. Reagan decided it was better to incentivise people to take matters into their own hands by reducing taxation; it generated growth but didn't remove the free rider problem. Is it better to tackle a problem at source or later? And when you decide to tackle the problem at source, what's the best strategy? Anyone who's ever worked in a start-up knows the risk of free riders. If you're trying to create an industry standard or bring a piece of software to market, you need a well-aligned team where everyone is pulling their weight. The rewards can be high for taking the risks of early-stage start-ups. However, ask any successful entrepreneur and they'll tell you, off the record, that they've made other people's fortunes as well. That's why getting the corporate structure set up such that the people who take the biggest risk and commit the most are rewarded the most is vital. I've had so many entrepreneurs tell me very sad stories about their first time round as an entrepreneur. What to do? Remember the deal is always done at the beginning. The most you can do later is correct course, but you never renegotiate the deal that you make on the way into an agreement. Second, remember that courage is required to vanquish the major foes of any era. Don't be impressed with those who have charming personalities. Pay attention to those whose characters shine with real understanding of how to improve the lives of the most people at a time. Julie Meyer is CEO of Ariadne Capital, a London-based investment firm that advises and invests in companies globally; julie@ariadnecapital.com New Media Age is the UK's leading weekly
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