Network Formation via Contests: The Production Process of Open Source Software

Why do both software developers and firms contribute to the production process of Open Source Software (OSS) despite not receiving direct monetary rewards for it? This papers extends results of the economic literature by modelling the OSS production process as an application contest to a "qualified network". The winners receive reputation and high investments. Investors searching for highly talented applicants profit from the selection mechanism of the OSS production process and finance it to receive inside information. We describe incentives for developers and firms and compare the mechanism with alternatives for its efficiency.