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

38 Pages Posted: 12 May 2009

See all articles by Michael Schwarz

Michael Schwarz

Yahoo! - Yahoo! Research Labs; National Bureau of Economic Research (NBER)

Yuri Takhteyev

University of California, Berkeley

Date Written: May 2009


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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Suggested Citation

Schwarz, Michael and Takhteyev, Yuri, Half a Century of Public Software Institutions: Open Source as a Solution to Hold-Up Problem (May 2009). NBER Working Paper No. w14946, Available at SSRN: https://ssrn.com/abstract=1401791

Michael Schwarz (Contact Author)

Yahoo! - Yahoo! Research Labs ( email )

Sunnyvale, CA 94089

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yuri Takhteyev

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

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