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Half a Century of Public Software Institutions: Open Source as a Solution to Hold-Up Problem

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  • Michael Schwarz
  • Yuri Takhteyev

Abstract

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.

Suggested Citation

  • Michael Schwarz & Yuri Takhteyev, 2009. "Half a Century of Public Software Institutions: Open Source as a Solution to Hold-Up Problem," NBER Working Papers 14946, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14946
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    References listed on IDEAS

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    1. Josh Lerner, 2005. "The Scope of Open Source Licensing," Journal of Law, Economics, and Organization, Oxford University Press, vol. 21(1), pages 20-56, April.
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    4. Lerner, Josh & Tirole, Jean, 2002. "Some Simple Economics of Open," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 197-234, June.
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    6. Justin Pappas Johnson, 2002. "Open Source Software: Private Provision of a Public Good," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(4), pages 637-662, December.
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    11. Josh Lerner & Parag A. Pathak & Jean Tirole, 2006. "The Dynamics of Open-Source Contributors," American Economic Review, American Economic Association, vol. 96(2), pages 114-118, May.
    12. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
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    More about this item

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • 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, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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