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

Michael Schwarz and Yuri Takhteyev

No 14946, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D45 D62 D64 H4 H44 L17 L3 N8 O3 O31 O43 (search for similar items in EconPapers)
Date: 2009-05
New Economics Papers: this item is included in nep-his, nep-ict, nep-ipr, nep-pr~ and nep-ppm
Note: IO PE PR
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Published as Half a Century of Public Software Institutions: Open Source as a Solution to Hold-Up Problem MICHAEL SCHWARZ1, YURI TAKHTEYEV2 Article first published online: 19 JUL 2010 DOI: 10.1111/j.1467-9779.2010.01467.x

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