| 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. |