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The Economics of Knowledge Sharing

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3 pointsavyfain2 comments

For anyone interested, here is a direct link[1] to the scientific background to Tirole's 'Market Power and Regulation' ideas, which were kindly compiled by the committee. Open source is first mentioned on page 27 (out of 54).

[1]: http://www.nobelprize.org/nobel_prizes/economic-sciences/lau...

From the paper:

Open-source software: The literature on patent races assumes that R&D investments are driven by the traditional profit-motive. However, economists are increasingly realizing that not all new technologies originate in this way. An important example is Open Source Software (OSS), where programmers at many different locations and organizations share code to develop new software. This process was important in the development of the Internet, contributing such software as TCP/IP, BIND, Perl, Sendmail, Linux, Mozilla and Apache. What initially baffled economists was that OSS developers did not seem to benefit financially from their efforts. OSS is, in effect, a public good, which raises the question why OSS programmers contribute voluntarily, without pay, to the public good. Lerner and Tirole (2002) argued that economic theory may, in fact, be able to answer this question. Their main hypothesis is that software developers have career concerns. Contributing to the OSS may be a credible signal of one's programming ability, which may lead to job offers, shares in commercial open source-based companies, or access to the venture-capital market.35 Drawing on a previous literature on career concerns (e.g., Holmstrom, 1982), they argue that the signaling motive is stronger the more visible is performance, the higher the impact of effort on performance, and the more informative performance is about talent. They find support for the signaling motive in four case studies (Apache, Linux, Perl and Sendmail). Subsequent research also found support for Lerner and Tirole's (2002) signaling theory, at least for some OSS projects (e.g., Hann, Roberts and Slaughter, 2013, for Apache). However, programmers seem to contribute to OSS for a variety of reasons, perhaps including altruism. A satisfactory explanation of OSS development may require a mixture of signaling theory and insights, like those of 2009 Economics Laureate Elinor Ostrom, into how cooperative behavior can be supported by norms and other social mechanisms (O'Mahony, 2003).

Having read the paper, and taking the time to think about the whole 'signaling' explanation for open source, I'd say that in addition to ego and joy, signaling is a major motivator for contributing to open source software. While many programmers may contribute to any arbitrary project because of their interest or dependence on the software, the most effective way to signal your skill as a developer would be to contribute to software that is either a) used by the prospective employer to support their business, or b) developed by the employer himself (likely to support their business).

However, this theory doesn't take into account that one may contribute to an OSS project, because an employer is paying them to do this in the first place. Both employers and employees participate in OSS. Employees want to demonstrate their skill so that they would get employed, while employers want to demonstrate their organization's engineering talent to attract even more talent. The paper seems to assume that OSS signaling is simplex, whereas it is actually duplex. But beyond signalling, an organization open sourcing software can be seen as a way to encourage standardization of that software (Android, WebKit, V8, and in the future maybe Dart) instead of a competitor's potentially closed alternative (which might be more expensive to deploy/port/debug and so on).

Sun Microsystems' open sourcing of Solars and JVM can be seen as an attempt attract more talent to the company (which at that time was fairly unpopular, especially when compared to Google which was an open source darling).

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