Coase's penguin, or, Linux and The Nature of the Firm

For decades our common understanding of the organization of economic production has been that individuals order their productive activities in one of two ways: either as employees in firms, following the directions of managers, or as individuals in markets, following price signals. This dichotomy was first identified in the early work of Ronald Coase and was developed most explicitly in the work of institutional economist Oliver Williamson. Recently, public attention has focused on a fifteen-year-old phenomenon called free software or open source software. This phenomenon involves thousands, or even tens of thousands, of computer programmers who collaborate on large- and small-scale projects without traditional firm-based or market-based ownership of the resulting product. This Article explains why free software is only one example of a much broader social-economic phenomenon emerging in the digitally networked. environment, a third mode of production that the author calls "commons-based peer production." The Article begins by demonstrating the widespread use of commons-based peer production on the Internet through a number of detailed examples, such as Wikipedia, Slashdot the Open Directory Project, and Google. The Article uses these examples to reveal fundamental characteristics of commons-based peer production that distinguish it from the property- and contract-based modes of firms and markets. The central distinguishing characteristic. is that groups of individuals successfully collaborate on large-scale projects following a diverse cluster of motivational drives and social signals rather than market prices or managerial commands. The Article then explains why this mode has systematic advantages over markets and managerial hierarchies in the digitally networked environment when the object of production is information or culture. First, peer production has an advantage in what the author calls "information opportunity cost," because it loses less information about who might be the best person for a given job. Second, there are substantial increasing allocation gains to be captured from allowing large clusters of potential contributors to interact with large clusters of information resources in search of new projects and opportunities for collaboration. The Article concludes with an overview of how these models use a variety of technological, social, and formal strategies to overcome the collective action problems usually solved in managerial and market-based systems by property, contract, and managerial commands.