We argue that the intrinsic inefficiency of proprietary software has historically created a space for alternative institutions that provide software as a public good. We discuss several sources of such inefficiency, focusing on one that has not been described in the literature: the underinvestment due to fear of holdup. An inefficient holdup occurs when a user of software must make complementary investments, when the return on such investments depends on future cooperation of the software vendor, and when contracting about a future relationship with the software vendor is not feasible. We also consider how the nature of the production function of software makes software cheaper to develop when the code is open to the end users. Our framework explains why open source dominates certain sectors of the software industry (e.g., the top ten programming languages all have an open source implementation), while being almost none existent in some other sectors (none of the top ten computer games are open source). We then use our discussion of efficiency to examine the history of institutions for provision of public software from the early collaborative projects of the 1950s to the modern "open source" software institutions. We look at how such institutions have created a sustainable coalition for provision of software as a public good by organizing diverse individual incentives, both altruistic and profit-seeking, providing open source products of tremendous commercial importance, which have come to dominate certain segments of the software industry.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
14946.
Length: Date of creation: May 2009 Date of revision: Handle: RePEc:nbr:nberwo:14946
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Find related papers by JEL classification: D45 - Microeconomics - - Market Structure and Pricing - - - Rationing; Licensing D62 - Microeconomics - - Welfare Economics - - - Externalities D64 - Microeconomics - - Welfare Economics - - - Altruism H4 - Public Economics - - Publicly Provided Goods H44 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Goods: Mixed Markets L17 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Open Source Products and Markets L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise N8 - Economic History - - Micro-Business History O3 - Economic Development, Technological Change, and Growth - - Technological Change O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives O43 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
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