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The Yale Law Journal [Vol. 112:

Article

Coase’s Penguin, or,

Linux and The Nature of the Firm

Yochai Benkler†

CONTENTS

INTRODUCTION................................................................................................

I. PEER PRODUCTION ALL AROUND ............................................................

A. Content...............................................................................................
B. Relevance/Accreditation ....................................................................
C. Value-Added Distribution ..................................................................
D. Summary ............................................................................................

II. WHY WOULD PEER PRODUCTION EMERGE IN A

NETWORKED ENVIRONMENT?..................................................................
A. Locating the Theoretical Space for Peer Production ........................

† Professor of Law, New York University School of Law. Research for this Article was
partly supported by a grant from the Filomen D’Agostino and Max E. Greenberg Research Fund
at the New York University School of Law. I owe thanks to many for comments on this and
earlier drafts, including: Bruce Ackerman, Ed Baker, Elazar Barkan, Jamie Boyle, Dan Burk, Ben
Damstedt, Bob Ellickson, Terry Fisher, Natalie Jeremijenko, David Johnson, Dan Kahan, Niva
Elkin Koren, Tara Lemmey, Larry Lessig, Doug Lichtman, Jerry Mashaw, Eben Moglen, Mark
Nadel, Helen Nissenbaum, George Priest, Peggy Radin, Carol Rose, Chuck Sabel, Alan Schwartz,
Clay Shirky, Richard Stallman, and Kenji Yoshino. I owe special thanks to Steve Snyder for his
invaluable research assistance on the peer production enterprises described here.
I have gotten many questions about the “Coase’s Penguin” portion of the title. It turns out
that the geek culture that easily recognizes “Coase” doesn’t recognize the “Penguin,” and vice
versa. “Coase” refers to Ronald Coase, who originated the transaction costs theory of the firm that
provides the methodological template for the positive analysis of peer production that I offer here.
The penguin refers to the fact that the Linux kernel development community has adopted the
image of a paunchy penguin as its mascot/trademark. One result of this cross-cultural
conversation is that I will occasionally explain in some detail concepts that are well known in one
community but not in the other.
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2002] Coase’s Penguin

B. Peer Production of Information in a Pervasively

Networked Environment.....................................................................
C. Markets, Hierarchies, and Peer Production as
Information-Processing Systems........................................................
1. Information Gains .......................................................................
2. Allocation Gains..........................................................................

III. OF MOTIVATION AND ORGANIZATION: THE COMMONS PROBLEM .........

A. The “Incentives” Problem: Of Diverse Motivations and
Small Contributions ...........................................................................
1. Abstracting the Effect of Diverse Motivations.............................
2. Diverse Motivations and Large-Scale Collaborations................
B. Integration: Problem and Opportunity ..............................................
1. Threats to Motivation ..................................................................
2. Provisioning Integration .............................................................

CONCLUSION ...................................................................................................

INTRODUCTION

Imagine that back in the days when what was good for GM was good
for the country, an advisory committee of economists had recommended to
the President of the United States that the federal government should
support the efforts of volunteer communities to design and build cars, either
for sale or for free distribution to automobile drivers. The committee
members would probably have been locked up in a psychiatric ward—if
Senator McCarthy or the House Un-American Activities Committee did not
get them first. Yet, in September 2000, something like this actually
happened. The President’s Information Technology Advisory Committee
recommended that the federal government support open source software as
a strategic national choice to sustain the U.S. lead in critical software
development.1
At the heart of the economic engine of the world’s most advanced
economies, and in particular that of the United States, we are beginning to
take notice of a hardy, persistent, and quite amazing phenomenon. A new
model of production has taken root, one that should not be there, at least

1. PRESIDENT’S INFO. TECH. ADVISORY COMM., DEVELOPING OPEN SOURCE SOFTWARE TO

ADVANCE HIGH END COMPUTING (2000), at http://www.ccic.gov/pubs/pitac/pres-oss-
11sep00.pdf.
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according to our most widely held beliefs about economic behavior. The
intuitions of the late twentieth-century American resist the idea that
thousands of volunteers could collaborate on a complex economic project.
It certainly should not be that these volunteers will beat the largest and best-
financed business enterprises in the world at their own game. And yet, this
is precisely what is happening in the software industry.
The emergence of free software2 and the phenomenal success of its
flagships—the GNU/Linux operating system,3 the Apache web server, Perl,
sendmail, BIND—and many other projects4 should force us to take a
second look at the dominant paradigm we hold about productivity. In the
late 1930s, Ronald Coase wrote The Nature of the Firm,5 in which he
explained why firms emerge, defining firms as clusters of resources and
agents that interact through managerial command systems rather than
markets. In that paper, Coase introduced the concept of transaction costs,
which are costs associated with defining and enforcing property and
contract rights and which are a necessary incident of organizing any activity
on a market model. Coase explained the emergence and limits of firms
based on the differences in the transaction costs associated with organizing
production through markets or through firms. People use markets when the
gains from doing so, net of transaction costs, exceed the gains from doing
the same thing in a managed firm, net of organization costs. Firms emerge
when the opposite is true. Any individual firm will stop growing when its
organization costs exceed the organization costs of a smaller firm. This
basic insight was then extended and developed in the work of Oliver

2. I use the terms “free software” and “open source software” interchangeably in this Article.
Those who consider the phenomenon as first and foremost involving political values, to wit,
freedom, use the former, in self-conscious contradistinction to those who focus on the economic
significance, who use the latter. Compare ERIC RAYMOND, Homesteading the Noosphere, in THE
CATHEDRAL AND THE BAZAAR: MUSINGS ON LINUX AND OPEN SOURCE BY AN ACCIDENTAL
REVOLUTIONARY 65 (2001) [hereinafter THE CATHEDRAL AND THE BAZAAR] (focusing on the
economic significance), available at http://www.firstmonday.dk/issues/issue3_10/raymond/, with
Free Software Found., Why “Free Software” Is Better than “Open Source,” at
http://www.fsf.org/philosophy/free-software-for-freedom.html (last modified Aug. 26, 2002)
(focusing on the political significance). I have written and continue to write quite extensively on
the normative implications of how information production is organized, see, e.g., Yochai Benkler,
The Battle over the Institutional Ecosystem in the Digital Environment, 44 COMM. ACM 84
(2001), but not in this Article, where I generally abjure disputations over the terms.
3. I describe the operating system as GNU/Linux to denote that it is a combination of the
kernel development project initiated by Linus Torvalds in 1991 and of many other operating
system components created by the GNU project, which was originated in 1984 by Richard
Stallman, the father of free software. Throughout the Article, I refer to GNU or Linux separately
to denote the specific development project and to the operating system as GNU/Linux. I departed
from this practice in the title for stylistic purposes alone. The complete GNU/Linux operating
system is what everyone has in mind when they speak of the breathtaking success of free software
at making excellent high-end software.
4. For an excellent history of the free software movement and of the open source
development methodology, see GLYN MOODY, REBEL CODE (2001).
5. Ronald H. Coase, The Nature of the Firm, 4 ECONOMICA 386 (1937).
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2002] Coase’s Penguin

Williamson and other institutional economists who studied the relationship

between markets and managerial hierarchies as models of organizing
production.6
The emergence of free software as a substantial force in the software-
development world poses a puzzle for this organization theory. Free
software projects do not rely either on markets or on managerial hierarchies
to organize production. Programmers do not generally participate in a
project because someone who is their boss instructed them, though some
do. They do not generally participate in a project because someone offers
them a price, though some participants do focus on long-term appropriation
through money-oriented activities, like consulting or service contracts. But
the critical mass of participation in projects cannot be explained by the
direct presence of a command, a price, or even a future monetary return,
particularly in the all-important microlevel decisions regarding selection of
projects to which participants contribute.7 In other words, programmers
participate in free software projects without following the normal signals
generated by market-based, firm-based, or hybrid models.
This puzzle has attracted increasing attention from economists8 and
participants in the practice9 trying to understand their own success and its

6. The initial framing in terms of the opposition between markets and hierarchy was OLIVER
E. WILLIAMSON, MARKETS AND HIERARCHIES: ANALYSIS AND ANTITRUST IMPLICATIONS: A
STUDY IN THE ECONOMICS OF INTERNAL ORGANIZATION (1975) and OLIVER E. WILLIAMSON,
THE ECONOMIC INSTITUTIONS OF CAPITALISM (1985). See also Benjamin Klein et al., Vertical
Integration, Appropriable Rents, and the Competitive Contracting Process, 21 J.L. & ECON. 297
(1978) (discussing contractual relationships as blurring the line between markets and firms). State
hierarchies are also an option, and while the extreme version—socialist production—is largely
discredited, some state production of some goods, like power, is still very much in play. Here, I
focus only on market production, whether decentralized and price-driven or firm-based and
managed. Any arguments about the importance of governmental investment in science, research,
and the arts are independent of the potential conclusions for intellectual property that this Article
suggests.
7. Even if it could be established, as it has not, that most contributors to free software
development projects were motivated by extrinsic monetary rewards, like gaining consulting
contracts through reputation and human capital gains, price would still be of small explanatory
value if those motivations led to a general willingness to contribute to some project but did not
direct the actual selection of projects and type of contribution. It is revealing that while reputation
is perhaps the most readily available and widely cited extrinsic motivator to contribution, its
explanatory force wanes when the practices of two of the most successful free software projects
are considered. Neither the Apache project nor the Free Software Foundation publishes the names
of individual contributors. It is possible that reputation creation and flow is a more complex social
phenomenon within the high priesthood than would be implied by explicit attribution, or that the
star status of the highest priests is a sufficient reputation-based reward. It is also possible—indeed
likely—that people’s motivations are heterogeneous and that some people are more driven by
explicit reputation gains than others. Whether people who are more driven by explicit reputation
rewards will indeed cluster in projects where explicit reputation rewards are better organized
remains a question that has not yet been studied empirically.
8. An excellent overview of, and insightful contribution to, this literature is the working paper
STEVEN WEBER, THE POLITICAL ECONOMY OF OPEN SOURCE (Berkeley Roundtable on the Int’l
Econ., Working Paper No. 140, 2000), at http://brie.berkeley.edu/~briewww/pubs/wp/wp140.pdf.
9. The canonical references here are to two works by Eric Raymond, an open source software
developer who turned into the most vocal and widely read commentator on the phenomenon. ERIC
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sustainability given widespread contrary intuitions. Josh Lerner and Jean

Tirole present the best overarching view of the range of diverse
micromotivations that drive free software developers.10 This diversity of
motivations, somewhat more formalized and generalized, plays an
important role in my own analysis. Some writing by both practitioners and
observers, supporters and critics, has focused on the “hacker ethic,” and
analogized the sociological phenomenon to gift-exchange systems.11 Other
writing has focused on the special characteristics of software as an object of
production.12
In this Article, I approach this puzzle by departing from free software.
Rather than trying to explain what is special about software or hackers, I
generalize from the phenomenon of free software to suggest characteristics
that make large-scale collaborations in many information production fields
sustainable and productive in the digitally networked environment without
reliance either on markets or managerial hierarchy.13 Hence the title of this

RAYMOND, The Cathedral and the Bazaar, in THE CATHEDRAL AND THE BAZAAR, supra note 2,
at 19, available at http://www.firstmonday.dk/issues/issue3_3/raymond/; RAYMOND, supra note
2.
10. See Josh Lerner & Jean Tirole, Some Simple Economics of Open Source, 50 J. INDUS.
ECON. 197, 212-23 (2002). Eric von Hippel has provided both theoretical and empirical support
for the importance of the use value gained by users in a user-driven innovation environment, both
in software and elsewhere. See Eric von Hippel, Innovation by User Communities: Learning from
Open-Source Software, 42 SLOAN MGMT. REV. 82 (2001); Eric von Hippel, at
http://web.mit.edu/evhippel/www/Publications.htm (last visited Aug. 25, 2002) (providing access
to many collaborative papers); see also Jean-Michel Dalle & Nicolas Jullien, “Libre” Software:
Turning Fads into Institutions (Jan. 18, 2001), at http://opensource.mit.edu/papers/Libre-
Software.pdf (analyzing the heterogeneous motivations of contributors in free software projects).
11. In addition to Raymond, supporters of the sustainability of free software development
who have used this framework include Rishab Aiyer Ghosh, Cooking Pot Markets: An Economic
Model for the Trade in Free Goods and Services on the Internet, 3 FIRST MONDAY 3 (Mar. 2,
1998), at http://www.firstmonday.dk/issues/issue3_3/ghosh/. See also Peter Kollock, The
Economies of Online Cooperation: Gifts and Public Goods in Cyberspace, in COMMUNITIES IN
CYBERSPACE 220 (Marc A. Smith & Peter Kollock eds., 1999). Less sanguine views of this
development model, which are also based on the hacker-ethic framework, include Robert L.
Glass, The Sociology of Open Source: Of Cults and Cultures, IEEE SOFTWARE, May-June 2000,
at 104, and David Lancashire, Code, Culture and Cash: The Fading Altruism of Open Source
Development, 6 FIRST MONDAY 3 (Dec. 3, 2001), at http://www.firstmonday.org/
issues/issue6_12/lancashire/. For a discussion of the hacker ethic generally, not solely in the
context of free software development, see PEKKA HIMANEN, LINUS TORVALDS & MANUEL
CASTELLS, THE HACKER ETHIC (2001).
12. See, e.g., James Bessen, Open Source Software: Free Provision of Complex Public Goods
(July 2002), at http://www.researchoninnovation.org/opensrc.pdf.
13. The most closely related work in the open source software literature is the mapping of
diverse motivations, see supra notes 10-11, and those papers that try to explain the open source
software development model in terms of its information-sharing characteristics, see, e.g., Justin
Pappas Johnson, Economics of Open Source Software (May 17, 2001), at
http://opensource.mit.edu/papers/johnsonopensource.pdf (recognizing superior access to the talent
pool, but cautioning that free-riding will lead to underutilization); Anca Metiu & Bruce Kogut,
Distributed Knowledge and the Global Organization of Software Development (Feb. 2001), at
http://opensource.mit.edu/papers/kogut1.pdf (claiming that the value of a globally distributed skill
set will loosen the grip of the richest countries on innovation).
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2002] Coase’s Penguin

Article—to invoke the challenge that the paunchy penguin mascot of the
Linux kernel development community poses for the view of organization
rooted in Coase’s work.
Part I begins to tell the tale of the more general phenomenon through a
number of detailed stories. Tens of thousands of individuals collaborate in
five-minute increments to map Mars’s craters, fulfilling tasks that would
normally be performed by full-time Ph.D.s. A quarter of a million people
collaborate on creating the most important news and commentary site
currently available on technology issues. Twenty-five thousand people
collaborate to create a peer-reviewed publication of commentary on
technology and culture. Forty thousand people collaborate to create a more
efficient human-edited directory for the Web than Yahoo. I offer other
examples as well.
The point of Part I is simple. The phenomenon of large- and medium-
scale collaborations among individuals that are organized without markets
or managerial hierarchies is emerging everywhere in the information and
cultural production system. The question is how we should understand
these instances of socially productive behavior: What are the dynamics that
make them possible and successful, and how should we think about their
economic value?
My basic framework for explaining this emerging phenomenon
occupies Part II of the Article. Collaborative production systems pose an
information problem. The question that individual agents in such a system
need to solve in order to be productive is what they should do. Markets
solve this problem by attaching price signals to alternative courses of
action. Firms solve this problem by assigning different signals from
different agents different weights. To wit, what a manager says matters. In
order to perform these functions, both markets and firms need to specify the
object of the signal sufficiently so that property, contract, and managerial
instructions can be used to differentiate between agents, efforts, resources,

The only treatment that specifically uses aspects of Coase’s The Nature of the Firm as an
analytic framework for understanding free software is David McGowan, Legal Implications of
Open-Source Software, 2001 U. ILL. L. REV. 241. Congruent with Coase’s conclusion, McGowan
assumes that hierarchical control is necessary to coordinate projects in the absence of markets, and
he demonstrates this effect as applied to the Linux kernel development process. He then analyzes
how the licensing provisions and the social motivations and relationships involved in open source
software projects form the basis for the hierarchical aspects of this software development model.
Id. at 275-88. My own use of Coase’s insights is very different. See infra Part II. I apply Coase’s
insight regarding the centrality of comparative transaction costs to the organizational form that a
production enterprise will take. In my model, “information opportunity costs” play a similar role
in describing the comparative social cost of different organizational forms to the role played by
transaction costs more generally in the Coasean framework. Peer production emerges, as firms do
in Coase’s analysis, because it can have lower information opportunity costs under certain
technological and economic conditions. McGowan’s analysis therefore primarily intersects with
this Article where I suggest that the integration in peer production processes sometimes takes the
form of a hierarchy.
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The Yale Law Journal [Vol. 112:

and potential combinations thereof. Where agents, efforts, or resources

cannot be so specified, they cannot be accurately priced or managed. The
process of specification creates two sources of inefficiency. First, it causes
information loss. Perfect specification is unattainable because of transaction
costs associated with specifying the characteristics of each human and
material resource and each opportunity for utilization. Second, property and
contract make clusters of agents and resources sticky. A firm’s employees
will more readily work with a firm’s owned resources than with other
sources and will more readily collaborate with other employees of the firm
than with outsiders. It is not impossible to acquire and trade resources and
collaborative efforts, but this is done only when the perceived gains
outweigh the transaction costs. Nonproprietary production strategies can
improve on markets and firms by correcting these two failures.
Commons-based peer production, the emerging third model of
production I describe here, relies on decentralized information gathering
and exchange to reduce the uncertainty of participants. It has particular
advantages as an information process for identifying and allocating human
creativity available to work on information and cultural resources.14 It
depends on very large aggregations of individuals independently scouring
their information environment in search of opportunities to be creative in
small or large increments. These individuals then self-identify for tasks and
perform them for a variety of motivational reasons that I discuss at some
length.
If the problems of motivation and organization can be solved, then
commons-based peer production has two major advantages over firms and
markets. First, it places the point of decision about assigning any given
person to any given set of resources with the individual. Given the high
variability among individuals and across time in terms of talent, experience,
motivation, focus, availability, etc., human creativity is an especially
difficult resource to specify for efficient contracting or management. Firms
recognize this and attempt to solve this problem by creating various
incentive compensation schemes and intangible reward schemes, like
employee-of-the-month awards. These schemes work to some extent to
alleviate the information loss associated with managerial production, but

14. This third mode of production is in some measure similar to the artisan mode of
production identified by the path-breaking work MICHAEL J. PIORE & CHARLES F. SABLE, THE
SECOND INDUSTRIAL DIVIDE (1984). There are, however, sufficient qualitative differences that
make this a new phenomenon requiring its own set of understandings, rather than a latter-day
artisan cooperative. Most important are the scale of these collaborations, the absence of entry
barriers in many or most of them, and the absence of direct appropriation of the products. With
regard to organization literature, commons-based peer production stands in a similar relationship
to artisan production as, in the property literature, commons relate to common property regimes.
These are phenomena that share several characteristics, but ultimately diverge in central
characteristics that require different explanations.
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2002] Coase’s Penguin

only insofar as a firm’s agents and resources are indeed the best and only
insofar as these schemes capture all the motivations and contributions
accurately. Peer production provides a framework within which individuals
who have the best information available about their own fit for a task can
self-identify for the task. This provides an information gain over firms and
markets, but only if the system develops some mechanism to filter out
mistaken judgments that agents make about themselves. This is why
practically all successful peer production systems have a robust mechanism
for peer review or statistical weeding out of contributions from agents who
misjudge themselves.
The allocation gains of peer production are as important as the
information gains. Human creativity cannot be assumed to be an on-off
switch of suitability for a job, as simple models of industrial production
might treat labor. One cannot say in the information context that “this
person passes threshold suitability requirements to pull this lever all day”
and ignore variability beyond that fact. It is more likely that variability in
productivity will be large for different people with any given set of
resources and collaborators for any given set of projects. I describe this
diversity as a probability that any agent will be a good fit with a set of
resources and agents to produce valuable new information or cultural
goods. Peer production has an advantage over firms and markets because it
allows larger groups of individuals to scour larger groups of resources in
search of materials, projects, collaborations, and combinations than is
possible for firms or individuals who function in markets. Transaction costs
associated with property and contract limit the access of people to each
other, to resources, and to projects when production is organized on a
market or firm model, but not when it is organized on a peer production
model.15 Because fit of people to projects and to each other is variable,
there are increasing returns to the scale of the number of people, resources,
and projects capable of being combined.
The advantages of peer production are, then, improved identification
and allocation of human creativity. These advantages appear to have
become salient, because human creativity itself has become salient. In the
domain of information and culture, production generally comprises the
combination of preexisting information/cultural inputs, human creativity,
and the physical capital necessary to (1) fix ideas and human utterances in
media capable of storing and communicating them and (2) transmit them.

15. This is not to say that there are no transaction costs associated with peer production. It is
merely to say that these transaction costs, which largely fall under the rubric of “integration” that I
describe in Section III.B, are of a different type. They may undermine the successful integration
of a project or may make participation too costly for contributors, but they do not arise as a barrier
to prevent many individuals from collaborating in the same resource space or to prevent many
resources from populating that space.
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Existing information and culture are a public good in the strict economic
sense of being nonrival.16 The cost of physical capital was for more than
150 years the central organizing principle of information and cultural
production, from the introduction of high-cost, high-volume mechanical
presses, through telegraph, telephone, radio, film, records, television, cable,
and satellite systems. These costs largely structured production around a
capital-intensive, industrial model. The declining price of computation,
however, has inverted the capital structure of information and cultural
production. Inexpensive desktop PCs, as well as digital video and audio
systems, are now capable of performing most of the physical capital
functions that once required substantial investments. Where physical capital
costs for fixation and communication are low and widely distributed, and
where existing information is itself a public good, the primary remaining
scarce resource is human creativity. And it is under these conditions that the
relative advantages of peer production emerge to much greater glory than
possible before.
This leaves the motivation and organization questions. These generally
would fall under the “tragedy of the commons” critique, which I
purposefully invoke by calling the phenomenon “commons-based” peer
production. The traditional objections to the commons are primarily
twofold. First, no one will invest in a project if they cannot appropriate its
benefits. That is, motivation will lack. Second, no one has the power to
organize collaboration in the use of the resource. That is, organization will
lack and collaboration will fail. The past decade or so, however, has seen an
important emerging literature on some successful commons and common
property regimes.17 These primarily involve the introduction of a variety of
nonproperty-based schemes for structuring cooperation among relatively
limited groups of participants. While offering important insights into how
formal and informal norms can structure collaboration, these studies of

16. While the reference to information as a public good is common, the reference to culture is
not. I have no intention to go into subtle definitions of culture here, though I tend to follow the
approach offered in J.M. BALKIN, CULTURAL SOFTWARE (1998), by thinking of culture as a
framework for comprehension. By “culture” I mean a set of representations, conceptions,
interpretations, knowledge of social behavior patterns, etc., whose particular application to
reducing uncertainty for human action is too remote to be called “information,” but which is
indispensable to the way we make sense of the world. “Cultural production” as I use it here can be
done by parents, teachers, Hollywood, Mozart, the Pope, peer groups, and the guys playing guitars
in Washington Square Park. Defined as a set of conceptions and their representations and as sets
of behavioral instructions, its economic character is similar to ideas or information. Obviously,
embodiments of culture, like a specific statue or building, are no more nonrival than embodiments
of any other form of information, like a book or a corkscrew.
17. For discussions of commons, see ELINOR OSTROM, GOVERNING THE COMMONS: THE
EVOLUTION OF INSTITUTIONS FOR COLLECTIVE ACTION (1990); and Carol Rose, The Comedy of
the Commons: Custom, Commerce, and Inherently Public Property, 53 U. CHI. L. REV. 711
(1986). A brief discussion of these concepts as applied to peer production follows below. See infra
notes 112-120 and accompanying text.
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2002] Coase’s Penguin

common appropriation regimes do not give a complete answer to the

sustainability of motivation and organization for the truly open, large-scale
nonproprietary peer production projects we see on the Internet.
My answer to these problems occupies Part III. The motivation problem
is solved by two distinct analytic moves. The first involves the proposition
that diverse motivations animate human beings, and, more importantly, that
there exist ranges of human experience in which the presence of monetary
rewards is inversely related to the presence of other, social-psychological
rewards. The interaction between money, love, and sex offers an obvious
and stark example, but the tradeoffs that academics face between selling
consulting services, on the one hand, and writing within a research agenda
respected by peers, on the other hand, are also reasonably intuitive. Given
these propositions, it becomes relatively straightforward to see that there
will be conditions under which a project that can organize itself to offer
social-psychological rewards removed from monetary rewards will attract
certain people, or at least certain chunks of people’s days, that monetary
rewards would not.
The second analytic move involves understanding that when a project
of any size is broken up into little pieces, each of which can be performed
by an individual in a short amount of time, the motivation to get any given
individual to contribute need only be very small. This suggests that peer
production will thrive where projects have three characteristics. First, they
must be modular. That is, they must be divisible into components, or
modules, each of which can be produced independently of the production of
the others. This enables production to be incremental and asynchronous,
pooling the efforts of different people, with different capabilities, who are
available at different times. Second, the granularity of the modules is
important and refers to the sizes of the project’s modules. For a peer
production process to pool successfully a relatively large number of
contributors, the modules should be predominately fine-grained, or small in
size. This allows the project to capture contributions from large numbers of
contributors whose motivation levels will not sustain anything more than
small efforts toward the project. Novels, for example, at least those that
look like our current conception of a novel, are likely to prove resistant to
peer production.18 In addition, a project will likely be more efficient if it can
accommodate variously sized contributions. Heterogeneous granularity will

18. The most successful novel-like enterprise on the Internet of which I know is “The
Company Therapist.” Pipsqueak Prods., The Company Therapist, at http://www.thetherapist.com
(last visited Aug. 31, 2002). There, the collaborative fiction problem was solved by building a
system that enabled anyone to contribute a small chunk—patient’s interview notes, therapist’s
comments, etc.—to the company therapist’s files. The common project is to create a fascinating
mosaic of people and stories seen through the eyes of a company therapist. Most collaborative
fiction sites, however, suffer from the fact that modularity and granularity lead to disjunction
relative to our expectations of novels.
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allow people with different levels of motivation to collaborate by making

smaller- or larger-grained contributions, consistent with their levels of
motivation. Third, and finally, a successful peer production enterprise must
have low-cost integration, which includes both quality control over the
modules and a mechanism for integrating the contributions into the finished
product. If a project cannot defend itself from incompetent or malicious
contributions and integrate the competent modules into a finished product at
sufficiently low cost, integration will either fail or the integrator will be
forced to appropriate the residual value of the common project—usually
leading to a dissipation of the motivations to contribute ex ante. Automated
integration and iterative peer production of integration are the primary
mechanisms by which peer production projects described in this Article
have lowered the cost of integration to the point where they can succeed
and sustain themselves. The use of free software to integrate peer
production of other information goods is a prime example. As for a
project’s mechanisms for defending itself from incompetent or malicious
contributions, one sees peer production enterprises using a variety of
approaches toward solving collective action problems that are relatively
familiar from the commons literature offline. These include various formal
rules, like the GNU General Public License (GPL)19 that prevents
defection20 from many free software projects, including most prominently
its flagship, GNU/Linux. They also include technical constraints that
prevent or limit the effects of defection. Social norms too play a role in
sustaining some of these collaborations, in both small groups and larger
groups where the platform allows for effective monitoring and repair when
individuals defect. Finally, the sheer size of some of these projects enables
the collaboration platform to correct for defection by using redundancy of

19. The GNU GPL is the most important institutional innovation of the Free Software
Foundation founded by Richard Stallman. Free Software Found., GNU General Public License, at
http://www.fsf.org/copyleft/gpl.html (last visited Aug. 31, 2002). It prevents defection from free
software projects in the form of combining code others have written with one’s own code and then
releasing it under more restrictive license terms than the original free software. This license does
not prevent commercial distribution of free software for a fee. It places certain limits on how the
software can be used as an input into derivative works that would be made less free than the
original. In this, it radically breaks from the concept of the public domain that underlies copyright
law’s general background rule for nonproprietary materials. For discussions of the GPL and its
legal nature and institutional characteristics, see Eben Moglen, Enforcing the GPL, LINUXUSER,
Sept. 2001, at 66, http://www.linuxuser.co.uk/articles/issue14/lu14-Free_Speech-Enforcing_the_
GPL.pdf; and Eben Moglen, Enforcing the GPL II, LINUXUSER, Oct. 2001, at 66,
http://www.linuxuser.co.uk/articles/issue15/lu15-Free_Speech-Enforcing_the_GPL_part_two.pdf.
Moglen’s views are particularly important since he has been General Counsel to the Free Software
Foundation for the past decade and has more experience with enforcing this license than anyone
else. More detailed academic treatments include McGowan, supra note 13, and Margaret Jane
Radin & R. Polk Wagner, The Myth of Private Ordering: Rediscovering Legal Realism in
Cyberspace, 73 CHI.-KENT L. REV. 1295 (1998).
20. I use the term “defection” to describe any action that an agent who participates in a
cooperative enterprise can take to increase his or her own benefit from the common effort in a
way that undermines the success or integrity of the common effort.
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2002] Coase’s Penguin

contributions and averaging out of outliers—be they defectors or

incompetents.
The normative implications of recognizing peer production are
substantial. At the level of political morality, the shape of freedom and
equality in the emerging social-technological condition we associate with
the Internet is at stake. Political views can take radical forms, both
anarchistic and libertarian, as they do in the work of Eben Moglen, who
was the first to identify the phenomenon I now call peer production,21 and
in the minds of many in the free software community.22 But the stakes for
freedom and equality are high for a wide range of liberal commitments.23 At
the level of institutional design, the emergence of commons-based peer
production adds a new and deep challenge to the prevailing policy of rapid
expansion of the scope of exclusive rights in information and culture that
has been the predominant approach in the past twenty-five years, as James
Boyle’s work on the second enclosure movement elegantly elucidates.24
Additionally, the dynamic of decentralized innovation plays a central role
in Lawrence Lessig’s forceful argument for embedding the openness of
commons in the architecture of the Internet.25 In this Article, however, I do
not attempt to add to the normative literature. Instead, the Article is
intended as a purely descriptive account of the scope of the empirical
phenomenon and its analytic drivers.
One important caveat is necessary. I am not suggesting that peer
production will supplant markets or firms. I am not suggesting that it is
always the more efficient model of production for information and culture.
What I am saying is that this emerging third model is (1) distinct from the
other two and (2) has certain systematic advantages over the other two in
identifying and allocating human capital/creativity. When peer production

21. Eben Moglen, Anarchism Triumphant: Free Software and the Death of Copyright, 4
FIRST MONDAY 1 (Aug. 2, 1999), at http://www.firstmonday.dk/issues/issue4_8/moglen/. The
descriptive insight in that paper that corresponds to peer production is the phenomenon he calls
Moglen’s Metaphorical Corollary to Faraday’s Law:
Moglen’s Metaphorical Corollary to Faraday’s Law says that if you wrap the Internet
around every person on the planet and spin the planet, software flows in the network.
It’s an emergent property of connected human minds that they create things for one
another’s pleasure and to conquer their uneasy sense of being too alone.
Id.
22. Canonical, of course, are Richard Stallman’s ideas, which permeate the “Philosophy of
the GNU Project.” See Free Software Found., Philosophy of the GNU Project, at
http://www.gnu.org/philosophy/philosophy.html (last visited Aug. 25, 2002).
23. I outline the breadth of the range of liberal commitments affected by these issues in
Yochai Benkler, Freedom in the Commons: Towards a Political Economy of Information, 52
DUKE L.J. (forthcoming 2003).
24. See James Boyle, The Second Enclosure Movement and the Construction of the Public
Domain, Paper Presented at the Conference on the Public Domain, Duke Law School, Nov. 9-11,
2001, at http://www.law.duke.edu/pd/papers/boyle.pdf.
25. LAWRENCE LESSIG, THE FUTURE OF IDEAS: THE FATE OF THE COMMONS IN A
CONNECTED WORLD (2001).
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will surpass the advantages that the other two models may have in
triggering or directing human behavior through the relatively reliable and
reasonably well-understood triggers of money and hierarchy is a matter for
more detailed study. I offer some ways of understanding the limitations of
this model of production in Part III, but do not attempt a full answer to
these questions here.

I. PEER PRODUCTION ALL AROUND

While open source software development has captured the attention and
devotion of many, it is by no stretch of the imagination the first or most
important instance of production by peers who interact and collaborate
without being organized on either a market-based or a
managerial/hierarchical model. Most important in this regard is the
academic enterprise, and in particular scientific research. Thousands of
individuals make contributions to a body of knowledge, set up internal
systems of quality control, and produce the core of our information and
knowledge environment. These individuals do not expect to exclude from
their product anyone who does not pay for it, and for many of them the
opportunity cost of participating in academic research, rather than applying
themselves to commercial enterprise, carries a high economic price tag. In
other words, individuals produce on a nonproprietary basis and contribute
their product to a knowledge “commons” that no one is understood as
“owning,” and that anyone can, indeed is required by professional norms to,
take and extend. We appropriate the value of our contributions using a
variety of methods: service-based rather than product-based models
(teaching rather than book royalties), grant funding from government and
nonprofit sources, as well as reputation and similar intangible but
immensely powerful motivations embodied in prizes, titles, etc. In the
excitement of a moment that feels like one of great transformation, it is
easy, though unjustifiable, to forget that information production is one area
where we have always had a mixed system of commercial/proprietary and
nonproprietary peer production—not as a second best or a contingent
remainder from the Middle Ages, but because at some things the
nonproprietary peer production system of the academic world is simply
better.26

26. An early version of this position is Richard R. Nelson, The Simple Economics of Basic
Scientific Research, 67 J. POL. ECON. 297 (1959). More recently one sees the work, for example,
of Rebecca S. Eisenberg. See Rebecca S. Eisenberg, Public Research and Private Development:
Patents and Technology Transfer in Government-Sponsored Research, 82 VA. L. REV. 1663,
1715-24 (1996) (summarizing the argument for giving preference to universities and nonprofit
institutions in the allocation of patent rights). For a historical description of the role of market and
nonmarket institutions in science, see P.A. David, From Market Magic to Calypso Science Policy,
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2002] Coase’s Penguin

In one way, however, academic peer production and commercial

production are similar. Both are composed of people who are professional
information producers. The individuals involved in production have to keep
body and soul together from information production. However low the
academic salary is, it must still be enough to permit one to devote most of
one’s energies to academic work. The differences reside in the modes of
appropriation and in the modes of organization—in particular, how projects
are identified and how individual effort is allocated to projects. Academics
select their own projects and contribute their work to a common pool that
eventually comprises our knowledge of a subject matter, while
nonacademic producers will often be given their marching orders by
managers, who take their cue from market studies and eventually sell the
product in the market.
Alongside the professional model, it is also important to recognize that
we have always had nonprofessional information and cultural production on
a nonproprietary model. Individuals talking to each other are creating
information goods, sometimes in the form of what we might call
entertainment and sometimes as a means for news distribution or
commentary. Nonprofessional production has been immensely important in
terms of each individual’s information environment. If one considers how
much of the universe of communications one receives in a day from other
individuals in one-to-one or small-scale interactions—such as e-mail, lunch,
or hallway conversations—the effect becomes tangible.
Nonetheless, ubiquitous computer communications networks are
bringing about a dramatic change in the scope, scale, and efficacy of peer
production. As computers and network connections become faster, cheaper,
and more ubiquitous, we are seeing the phenomenon of nonprofessional
peer production of information scale to much larger sizes and perform more
complex tasks than were possible in the past for nonprofessional
production. To make this phenomenon more tangible, I will describe in this
Part a number of such enterprises, organized to demonstrate the feasibility
of this approach throughout the information-production and information-
exchange chain.
While it is possible to break an act of communication into finer-grained
subcomponents,27 largely we see three distinct functions involved in the
process. First, there is an initial utterance of a humanly meaningful
statement. Writing an article or drawing a picture is such an action, whether
done by a professional or an amateur and whether high quality or low.
Second, there is the separate function of mapping the initial utterances onto

26 RES. POL’Y 229 (1997) (reviewing TERENCE KEALEY, THE ECONOMIC LAWS OF SCIENTIFIC
RESEARCH (1996)).
27. See Yochai Benkler, Communications Infrastructure Regulation and the Distribution of
Control over Content, 22 TELECOMM. POL’Y 183, 186 (1998).
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a knowledge map. In particular, an utterance must be understood as

“relevant” and “credible.” Relevance is a subjective question of mapping an
utterance on the conceptual map of a given user seeking information for a
particular purpose defined by that individual. If I am interested in learning
about the political situation in Macedonia, a news report from Macedonia or
Albania is relevant, even if sloppy, while a Disney cartoon is not, even if
highly professionally rendered. Credibility is a question of quality by some
objective measure that the individual adopts for purposes of evaluating a
given utterance. Again, the news report may be sloppy and not credible,
while the Disney cartoon may be highly accredited as a cartoon. The
distinction between the two is somewhat artificial, however, because very
often the utility of a piece of information will depend on a combined
valuation of its credibility and relevance. A New York Times story on the
Balkans in general, for example, will likely be preferable to excited gossip
in the cafeteria specifically about Macedonia. I will therefore refer to
“relevance/accreditation” as a single function for purposes of this
discussion, keeping in mind that the two are complementary and not
entirely separable functions that an individual requires in order to use
utterances of others in putting together the user’s understanding of the
world.
Finally, there is the function of distribution, or how one takes an
utterance produced by one person and distributes it to other people who find
it credible and relevant. In the mass media world, these functions were
often, though not always, integrated. NBC News produced the utterances,
gave them credibility, and distributed them. The Internet is permitting much
greater disaggregation of these functions, and so this Part will proceed to
describe how each component of this information-production chain is being
produced using a peer-based model on the Internet for information and
cultural goods other than software.

A. Content

NASA Clickworkers is “an experiment that showed that public

volunteers (clickworkers), many working for a few minutes here and
there . . . can do some routine science analysis that would normally be done
by a scientist or graduate student working for months on end.”28 Users can
mark craters on maps of Mars, classify craters that have already been
marked, or search the landscape of Mars for “honeycomb” terrain. The
project is “a pilot study with very limited funding, run part-time by one

28. NASA, Welcome to the Clickworkers Study, at http://clickworkers.arc.nasa.gov/top (last

visited Aug. 31, 2002).
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2002] Coase’s Penguin

software engineer, with occasional input from two scientists.”29 In its first
six months of operation, more than 85,000 users visited the site, with many
contributing to the 1.9 million entries recorded (including redundant entries
of the same craters used to average out errors). An analysis of the quality of
markings showed that “the automatically-computed consensus of a large
number of clickworkers is virtually indistinguishable from the inputs of a
geologist with years of experience in identifying Mars craters.”30 The tasks
performed by clickworkers are discrete, and each iteration is easily
performed in a matter of minutes. As a result, users can choose to work for
a few minutes by doing one iteration or for hours by doing many, with an
early study of the project suggesting that some clickworkers indeed work
on the project for weeks, but that 37% of the work was done by one-time
contributors.31
The Clickworkers project is a particularly crisp example of how
complex professional tasks that formerly required budgeting the full-time
salaries of a number of highly trained individuals can be reorganized to be
performed by tens of thousands of volunteers in increments so minute that
the tasks can now be performed on a much lower budget. This low budget
is devoted to coordinating the volunteer effort, and the raw human capital
needed is contributed for the fun of it. The professionalism of the original
scientists is replaced by a combination of fine-grained modularization of the
task with redundancy and automated averaging out of both errors and
purposeful defections (for example, purposefully erroneous markings).32
NASA scientists running this experiment tapped into a vast pool of five-
minute increments of human judgment applied with motivation that is
unrelated to keeping together the bodies and souls of the agents.
While Clickworkers is a distinct, self-conscious experiment, it suggests
characteristics of distributed production that are quite widely observable.
Consider, for example, how the networked environment has enabled new
ways of fulfilling the traditional function of encyclopedias or almanacs. At
the most general level, consider the World Wide Web itself. Individuals put
up websites with all manner of information, in all kinds of quality and
focus, for reasons that have nothing to do with external, well-defined
economic motives—just like the individuals who identify craters on Mars.
A user interested in information need only plug a request into a search

29. NASA, Credits and Contacts, at http://clickworkers.arc.nasa.gov/contact (last visited

Aug. 31, 2002).
30. NASA, CLICKWORKERS RESULTS: CRATER MARKING ACTIVITY (July 3, 2001), at
http://clickworkers.arc.nasa.gov/documents/crater-marking.pdf.
31. B. KANEFSKY ET AL., CAN DISTRIBUTED VOLUNTEERS ACCOMPLISH MASSIVE DATA
ANALYSIS TASKS? 1 (2001), at http://clickworkers.arc.nasa.gov/documents/abstract.pdf.
32. NASA, supra note 30, at 3 (describing, among other things, the exclusion of the markings
of a student in an art class who marked concentric circles for a class assignment instead of trying
to mark craters).
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engine like Google, and dozens or hundreds of websites will appear. Now,
there is a question of how to select among them—the question of relevance
and accreditation—but that is for the next Section. For now it is important
to recognize that the Web is a global library produced by millions of
people. Whenever you sit down to search for information, there is a very
high likelihood that someone, somewhere, has produced a usable answer,
for whatever reason—pleasure, self-advertising, or fulfilling some other
public or private goal as a nonprofit or for-profit institution that sustains
itself by means other than selling the information you need. The power of
the Web to answer such an encyclopedic question comes not from the fact
that one particular site has all the great answers. It is not an Encyclopedia
Britannica. The power comes from the fact that it allows a user looking for
specific information at a given time to collect answers from a sufficiently
large number of contributions. The task of sifting and accrediting falls to
the user, who is motivated by the need to find an answer to the question
posed. As long as there are tools to lower the cost of that task to a level
acceptable to the user, the Web will have “produced” the information
content the user sought. These are not trivial considerations, but they are
also not intractable. As we shall see, some of the solutions can themselves
be peer produced and some solutions are emerging as a function of the
speed of computation and communication, which enables more efficient
technological solutions.
One might argue that the Internet is still not an encyclopedia, in the
sense of a coherently ordered locus of a wide range of human knowledge in
relatively accessible and digested form. Can that task, which requires more
disciplined writing, be performed within a distributed model? The
beginning of an answer is provided by the Wikipedia project.33 The project
involves roughly 2000 volunteers who are collaborating to write an
encyclopedia. The project runs on a free software collaborative authorship
tool, Wiki, which is a markup language similar in concept to HTML, but is
relatively easier to implement, allows multiple people to edit a single
document and interlock multiple documents, and generates archives of the
changes made to each. While 2000 people have not been able to generate a
complete encyclopedia in roughly 18 months of operation, they have made
substantial progress, producing about 30,000 articles, and readers are
invited to evaluate the quality.34 A comparison to www.encyclopedia.com,
the online version of the Columbia Encyclopedia, would suggest that
Wikipedia cannot yet be said to be either systematically better or worse.
Given that it is a volunteer effort, and that the comparison is to an

33. Wikipedia, Main Page, at http://www.wikipedia.com (last visited Aug. 31, 2002).
34. The terms “chimpanzee,” “computational complexity theory,” or simply “copyright,” for
example, provide good demonstrations.
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2002] Coase’s Penguin

established commercial encyclopedia, that is actually saying quite a bit.

Perhaps the most interesting characteristic about Wikipedia is the self-
conscious social-norms-based dedication to objective writing. The
following fragments from the self-described essential characteristics and
basic policies of Wikipedia are illustrative:

First and foremost, the Wikipedia project is self-consciously an

encyclopedia—rather than a dictionary, discussion forum, web
portal, etc. See encyclopedia as well as what Wikipedia is not.

....

Wikipedia’s participants commonly follow, and enforce, a few

basic policies that seem essential to keeping the project running
smoothly and productively. The following are just a few of those
policies; for more information, please see Wikipedia policy.

First, because we have a huge variety of participants of all

ideologies, and from around the world, Wikipedia is committed to
making its articles as unbiased as possible. The aim is not to write
articles from a single objective point of view—this is a common
misunderstanding of the policy—but rather, to fairly and
sympathetically present all views on an issue. See neutral point of
view page for further explanation, and for a very lengthy
discussion.35

The participants of Wikipedia are plainly people who like to write.

Some of them participate in other collaborative projects, like
Everything2.com.36 But when they enter the common project of Wikipedia,

35. Wikipedia, Essential Characteristics, at http://www.wikipedia.com/wiki/wikipedia (last

visited Aug. 31, 2002) (hyperlinks indicated by underlining). The “Neutral Point of View” page is
indeed revealing of how explicit and central to the project the social norm of objective writing is.
See Wikipedia, Neutral Point of View, at http://www.wikipedia.com/wiki/wikipedia:neutral
+point+of+view (last visited Aug. 31, 2002).
36. See Everything Dev. Co., [email protected], at http://www.everything2.com
(last visited Aug. 31, 2002). Everything2 is a “complex online community with a focus to write,
publish and edit a quality database of information, insight and humor.” Id. (under the “Everything
FAQ” hyperlink). The system enables registered users to post “write-ups” and create “nodes”
pertaining to particular topics that they define. It does not have a directory structure; instead,
nodes are linked together with hypertext within the text of the node and also with a matrix of
related links at the bottom of each node. The linking is done initially by the author—thereby self-
generating a conceptual map—and later by others. A node is a particular topic identified by the
title of the node. After the author of the first write-up creates a “nodeshell,” other users can add
additional write-ups to that node. Write-ups are constantly being reviewed and removed by
editors. Editors are chosen based on “merit, seniority and writing skill.” Everything Dev. Co., The
Power Structure of Everything2, at http://www.everything2.com/index.pl?node_id=743129 (last
visited Nov. 11, 2002). Everything2 also contains a voting system for non-editor users to vote on
each other’s write-ups. Although each write-up has a reputation based on whether it has been
voted up or down, the write-up does not get automatically filtered due to a low reputation. In other
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they participate in a particular way—a way that the group has adopted to
make its “encyclopedia.”37 Wikipedia provides a rich example of a
medium-sized collection of individuals who successfully collaborate to
create an information product of mid- to highbrow quality. In particular, it
suggests that even in a group of this size, social norms coupled with a
simple facility to allow any participant to edit out blatant opinion written by
another in contravention of the social norms keep the group on track.
Perhaps the most sophisticated locus of peer reviewed, mid- to high-
quality essays published on the Internet as of early 2002 is Kuro5hin, also
known as K5.38

Kuro5hin.org is a community of people who like to think. You will

not find garbage in the discussions here, because noise is not
tolerated. This is a site for people who want to discuss the world
they live in. It’s a site for people who are on the ground in the
modern world, and who sometimes look around and wonder what
they have wrought.39

As of March 2002, it appeared that Kuro5hin had roughly 25,000

users.40 Articles run a broad gamut of topics but are supposed to be roughly
centered around technology and culture. The general headings include
Technology, Culture, Politics, Media, News, Op-ed, Columns, Meta
(dedicated to discussion of K5 itself), and MLP (mindless link propagation,
a general catchall category of things the community members find
interesting). The articles include news reports from other sources, but most
of the interesting materials provide some form of commentary as well. The
articles and responses to them are fairly substantial.

words, the system combines individually authored materials and individually defined mappings of
relevance of materials with common procedures, some purely democratic and some based on a
rotating hierarchy of editors appointed by experience and reputation built from the collective
judgments of their peers. The result is a substantial database of writings on a wide variety of
topics.
37. On their interpretation, creating an encyclopedia entry means conveying in brief terms the
state of the art on the topic, including divergent opinions about it, but not the author’s opinion.
Whether that is an attainable goal is a subject of interpretive theory and is a question as applicable
to a professional encyclopedia as it is to Wikipedia.
38. Kuro5hin, Front Page, at http://www.kuro5hin.org (last visited Aug. 31, 2002). The
discussion here is deeply indebted to the work of Caio M.S. Pereira Neto. See Caio M.S. Pereira
Neto, Kuro5hin.org, Collaborative Media, and Political Economy of Information (May 24, 2002)
(unpublished manuscript, on file with author). Another source is Everett Teach et al., Ethnography
of Kuro5hin.org, at http://ccwf.cc.utexas.edu/~hackett/k5/ (last visited Aug. 31, 2002).
39. Kuro5hin, Mission Statement, at http://ww.kuro5hin.org/special/mission (last visited
Sept. 25, 2002) (emphasis omitted).
40. How Will K5 Avoid Being Crushed by Content? (Mar. 17, 2002), at
http://www.kuro5hin.org/story/2002/3/16/51221/8976.
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2002] Coase’s Penguin

The site and community have a heavy emphasis on the quality of

materials published. The guide to article submissions41 emphasizes quality
of information and writing multiple drafts and prepares new contributors for
the experience of close peer review of their submission. Additionally, the
software that runs Kuro5hin, Scoop, a free software project initiated by one
of the cofounders of K5, implements a series of steps both before and after
submission and publication of an article that serve as collaborative quality-
control mechanisms. The emphasis on quality is enforced by the site’s
mechanism for peer review prepublication and peer commentary
postpublication.42
A very different type of trend in collaborative creation is the emergence
and rise of computer games, in particular multiplayer online games. These
fall in the same cultural “time slot” as television shows and movies of the
twentieth century. The interesting thing about them is that they are
structurally different. In a game like Ultima Online or EverQuest, the role
of the commercial provider is not to tell a finished, highly polished story to
be consumed start to finish by passive consumers. Rather, the role of the
game provider is to build tools with which users collaborate to tell a story.
There have been observations about this approach for years regarding
MUDs and MOOs.43 The point here is that there is a type of “content” that

41. Kuro5hin, FAQ—Article Submission Questions, at http://www.kuro5hin.org/

?op=special;page=article (last visited Aug. 31, 2002).
42. When an article is submitted, it is not automatically placed in a publicly viewable space.
It is placed, instead, in a submission queue. At that point, all registered users of K5 have an
opportunity to comment on the article, provide suggestions for correction and improvement, and
vote their opinion whether they think the story should be placed on the front page, a specialty
page, or rejected. The system determines some critical number of votes necessary for any one of
these actions, based on the number of users then registered. Typically, rejection requires fewer
votes than acceptance. Articles may be resubmitted after being rejected, typically after having
been revised in accordance with the comments. The system up to this point is remarkably similar
to academic peer review in many respects, except for the scope of participation and the egalitarian
and democratic structure of the editorial decision. After publication, K5 provides the platform for
readers to comment on articles and for other readers to rate these comments for their relevance
and quality. The system is different in various respects from the Slashdot system described in
detail infra Section I.B, but the principle is the same. It permits readers to post comments, and it
permits other readers to rate comments as better or worse. It aggregates these individual ratings
into collective judgments about the quality of comments, judgments that can then be used by the
site’s readers to filter out lower-quality comments. In general, all these characteristics go to
questions of how one generates relevance and accreditation on a peer production model and will
be explored in greater detail in the context of other sites in the next Section. The point to take
away at this juncture is that part of what makes K5 so successful in maintaining quality is a rather
elaborate, large-scale peer review system and postpublication commentary, which itself is then
peer reviewed in an iterative process.
43. MUDs (Multi-User Dungeon or Multi-User Dimension) and MOOs (MUD, Object
Oriented) are acronyms for software programs that create an interactive multiuser networked text-
based virtual world. The software maintains a database of users and objects with which the users
can interact in a variety of ways. MUDs are typically built around a theme. MUD “worlds” are
often based on books, movies, cartoons, and other role-playing games. See RPer’s Resources for
Interactive Roleplaying on Moos/Mucks/Muds/Mushes, at http://www.geocities.com/
TimesSquare/9944/ (last visited Aug. 31, 2002). Pavel Curtis, creator of perhaps the most famous
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of MOOs, LambdaMOO, identified three elements that distinguish MUDs from typical role-
playing games:
• A MUD is not goal-oriented; it has no beginning or end, no “score,”
and no notion of “winning” or “success.” In short, even though users of
MUDs are commonly called players, a MUD isn’t really a game at all.
• A MUD is extensible from within; a user can add new objects to the
database such as rooms, exits, “things,” and notes. Certain MUDs,
including the one I run, even support an embedded programming
language in which a user can describe whole new kinds of behavior for
the objects they create.
• A MUD generally has more than one user connected at a time. All of
the connected users are browsing and manipulating the same database
and can encounter the new objects created by others. The multiple users
on a MUD can communicate with each other in real time.
Pavel Curtis, Mudding: Social Phenomena in Text-Based Virtual Realities, in PROCEEDINGS OF
THE 1992 CONFERENCE ON THE DIRECTIONS AND IMPLICATIONS OF ADVANCED COMPUTING
(2002), at http://citeseer.nj.nec.com/curtis92mudding.html. There are acronyms for MUD-like
variations including MUSH, MUX, and MUCK. All of the variations run basically the same
software; the primary difference between them is how much freedom the characters have to
modify the environment. All M*s (M* refers to any MUD-like variants) are administered in some
way by those who set up the software and maintain the connectivity. Typically, the administrator
will set up the initial world and implement some coded commands. The administrator will also set
up a hierarchy of user levels granting users more control over the objects within the game as they
advance, such as the ability to create coded commands. It is these decisions—how much of the
world does the administrator create, how rich are the coded commands, does the administrator
allow users to have the power to manipulate the game—that distinguish the various M*s from
each other. MUDs are typically heavy on coded commands and designed to be battle-ready.
MUSHs, on the other hand, are “unlikely to have coded commands to the same extent that a MUD
will, relying instead on arbitration or consent to determine the effects of actions.” Michael
Sullivan, An Explanation of Terminology, at http://wso.williams.edu:8000/~msulliva/
mushes/explan.html (last visited Aug. 31, 2002). MOOs are perhaps the exception in that most of
them are not role-playing, but “educational or social.” Id.
Most important in the history of MUDs was LambdaMOO. “LambdaMOO is a MOO: a
MUD that uses an object-oriented programming language to manipulate objects in the virtual
world.” AT&T Cobot Project, What’s a LambdaMOO?, at http://cobot.research.att.com/
lambdaMOO.html (last visited Aug. 31, 2002). LambdaMOO was created in 1990 by Pavel Curtis
as a social experiment. “[It] is the first, most diverse, oldest, largest, and most well-known MOO.”
Rebecca Spainhower, Virtually Inevitable: Real Problems in Virtual Communities, at
http://world.std.com/~rs/inevitable.html (last visited Aug. 31, 2002). “When Pavel Curtis took on
the project of developing the MOO environment, he gave it a social focus instead of the game
goal of traditional MUDs.” Id. The original site has remained active for over a decade and
continues to thrive with over 100,000 people having participated in this one virtual world. As a
result, LambdaMOO is
a long-standing, ongoing experiment in collective programming and creation, with
often stunning results that can only be fully appreciated firsthand. Inventions include
technical objects, such as the lag meter, which provides recent statistics on server load;
objects serving a mix of practical and metaphorical purposes, such as elevators that
move users between floors; objects with social uses, such as the birthday meter, where
users register their birthdays publicly; and objects that just entertain or annoy, such as
the Cockatoo, a virtual bird who occasionally repeats an utterance recently overheard.
AT&T Cobot Project, supra (emphasis omitted). Jennifer Mnookin and Rebecca Spainhower
detail the evolution of the social structure of LambdaMOO. See Jennifer L. Mnookin, Virtual(ly)
Law: The Emergence of Law in LambdaMOO, 2 J. COMPUTER-MEDIATED COMM. 8 (June 1996),
at http://www.ascusc.org/jcmc/vol2/issue1/lambda.html; Spainhower, supra. Generally, the MOO
was administered by a few system administrators (called wizards within the game). Haakon (Pavel
Curtis’s wizard character) drafted a set of guidelines for behavior. When administration became
too overwhelming for the wizards, they appointed an “Architecture Review Board” of fifteen
trusted users to allocate space to new users. The wizards were still responsible, however, for
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2002] Coase’s Penguin

can be produced in a centralized professional manner—the screenwriter

here replaces the scientist in the NASA Clickworkers example—that can
also be organized using the appropriate software platform to allow the story
to be written by the many users as they experience it. The users are
coauthors whose individual contributions to the storyline are literally done
for fun. They are playing a game, but they are spending real economic
goods—their attention and substantial subscription fees—on a form of
entertainment that displaces passive reception of a finished, professionally
manufactured good with active coproduction of a storyline. The individual
contributions are much more substantial than the time needed to mark
craters, but then the contributors are having a whole lot more fun
manipulating the intrigues of their imaginary Guild than poring over
digitized images of faint craters on Mars.

B. Relevance/Accreditation

You might say that many distributed individuals can produce content,
but that it is gobbledygook. Who in their right mind wants to get answers to
legal questions from a fifteen-year-old child who learned the answers from
watching Court TV?44 The question then becomes whether relevance and
accreditation of initial utterances of information can itself be produced on a
peer production model. The answer is that it can. Some of the most
prominent web-based enterprises, both commercial and noncommercial,
demonstrate this answer by breaking off precisely the accreditation and
relevance piece of their product for peer production. Amazon.com and
Google are good examples in the commercial arena.
Amazon uses a mix of mechanisms to highlight books and other
products that its users are likely to buy.45 A number of these mechanisms

dealing with unruly users and mediating disputes. In 1993, the wizards turned that responsibility
over to the community at large by implementing a democratic petitioning and balloting system.
Since that time, the community has addressed problems of population growth, harassment, and the
behavior of anonymous guest accounts.
44. Michael Lewis, Faking It, N.Y. TIMES, July 15, 2001, § 6 (Magazine), at 32.
45. See Amazon.com, at http://www.amazon.com (last visited Aug. 31, 2002) (under the
“Friends and Favorites” hyperlink). Amazon is constantly testing new methods of peer producing
relevance and accreditation mechanisms and removing unpopular methods. These include both
automatically generated and human-made relevance maps. For example, “Page You Made” is
based on the user’s recent clicks on the site and lists a “Featured Item” as well as several “Quick
Picks,” which are products that are similar to the recently viewed items. The page features
“Listmania” lists, which are user-created topical lists, and a “More To Explore” section that
provides relevant links to a topical directory of the Amazon inventory. Users can also “Share
Purchases” and make their purchases available for other users to see. If the user finds a person
with similar tastes, these options could aid with relevance, and if the user finds a particularly
trustworthy person, it could aid in accreditation of the product. Amazon also provides discussion
boards for direct exchange between users. Amazon creates “Purchase Circles,” which are “highly
specialized bestseller lists,” based on aggregated data divided either geographically (by town or
city) or organizationally (by schools, government offices, or corporations). Id. (under the “Friends
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produce relevance and accreditation by harnessing the users themselves. At

the simplest level, the recommendation “Customers Who Bought Items You
Recently Viewed Also Bought These Items” is a mechanical means of
extracting judgments of relevance and accreditation from the collective
actions of many individuals who produce the datum of relevance as a by-
product of making their own purchasing decisions. At a more self-
conscious level (self-conscious, that is, on the part of the user), Amazon
allows users to create topical lists, and to track other users as their “Friends
and Favorites,” whose decisions they have learned to trust. Amazon also
provides users with the ability to rate books they buy, generating a peer-
produced rating by averaging the ratings. The point to take home from
Amazon is that a corporation that has done immensely well at acquiring and
retaining customers harnesses peer production to provide one of its salient
values—its ability to allow users to find things they want quickly and
efficiently.
Similarly, Google, which is widely recognized as the most efficient
general search engine currently operating, introduced a crucial innovation
into ranking results that made it substantially better than any of its
competitors. While Google uses a text-based algorithm to retrieve a given
universe of web pages initially, its PageRank software employs peer
production of ranking in the following way.46 The engine treats links from
other websites pointing to a given website as votes of confidence.
Whenever one person’s page links to another page, that person has stated
quite explicitly that the linked page is worth a visit. Google’s search engine
counts these links as votes of confidence in the quality of that page as
compared to other pages that fit the basic search algorithm. Pages that
themselves are heavily linked-to count as more important votes of
confidence, so if a highly linked-to site links to a given page, that vote
counts for more than if an obscure site links to it. By doing this, Google
harnessed the distributed judgments of many users, with each judgment
created as a by-product of making his or her own site useful, to produce a
highly valuable relevance and accreditation algorithm. Google’s experience
is particularly salient when juxtaposed with that of GoTo.com, which was a
search engine that sold placement on the search result list to the highest

and Favorites” followed by the “Purchase Circles” hyperlinks). The data is analyzed and
compared to site-wide trends to come up with lists of items that are more popular with that
particular group than with the general population. If users find a list particularly useful, they can
bookmark the list to view the changes as the list is updated to reflect new sales data. Amazon
software also recommends certain products to the user. These “Recommendations” are based on
items the user has purchased or rated, as well as their activity on the site contrasted with other
users’ activity. As a result, the recommendations can change when the user purchases or reviews
an item, or when the interests of other consumers change.
46. See Google, Inc., Our Search: Google Technology, at http://www.google.com/
technology/ (last visited Aug. 31, 2002).
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2002] Coase’s Penguin

bidder. It turns out that the site owner’s willingness to pay to be seen is not
necessarily a good measure of the utility its site provided to people who are
searching the Web. Google recently replaced Overture, GoTo’s current
name, as America Online’s (AOL’s) default search engine.47 A casual
search using both will reveal the difference in quality between the two, and
a search for “Barbie” will also yield interesting insights into the political
morality of pricing as opposed to voting as the basis of relevance
algorithms.
While Google is an automated mechanism of collecting human
judgment as a by-product of some other activity, there are also important
examples of distributed projects self-consciously devoted to peer
production of relevance. Most prominent among these is the Open
Directory Project (ODP).48 The site relies on tens of thousands of volunteer
editors to determine which links should be included in the directory.
Acceptance as a volunteer requires application. Admission relies on a peer
review process based substantially on seniority and the extent of a
volunteer’s engagement, as measured by the extent of his or her
contributions. The site is hosted and administered by Netscape, which pays
for server space and a small number of employees to administer the site and
set up the initial guidelines, but licensing is free to the number of sites who
use ODP as their web directory.49 This presumably adds value to AOL and
Netscape’s commercial search engine and portal as well as enhances the
company’s goodwill. The volunteers are not affiliated with Netscape,
receive no compensation, and manage the directory out of the joy of doing
so or for other internal or external motivations. The volunteers spend time
selecting sites for inclusion in the directory (in small increments of perhaps
fifteen minutes per site reviewed), thereby producing a comprehensive,
high-quality, human-edited directory of the Web—competing with, and
quite possibly outperforming, Yahoo in this category.
Perhaps the most elaborate multilayer mechanism for peer production
of relevance and accreditation is Slashdot.50 Billed as “News for Nerds,”
Slashdot primarily consists of users commenting on initial submissions that
cover a variety of technology-related topics. The submissions are typically
a link to an off-site story, coupled with some initial commentary from the
person who submits the piece. Users follow up the initial submission with
comments that often number in the hundreds. The initial submissions and
the approach to sifting through the comments of users for relevance and

47. David F. Gallagher, AOL Shifts Key Contract to Google, N.Y. TIMES, May 2, 2002, at C4.
48. Open Directory Project, at http://www.dmoz.org (last visited Aug. 31, 2002).
49. See Open Directory Project, Sites Using ODP Data, at http://dmoz.org/Computers/
Internet/Searching/Directories/Open_Directory_Project/Sites_Using_ODP_Data/ (last visited
Sept. 24, 2002) (listing the sites that are currently using the ODP).
50. Open Source Dev. Network, Inc., Slashdot: News for Nerds, Stuff That Matters, at
http://slashdot.org (last visited Aug. 31, 2002).
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accreditation provide a rich example of how this function can be performed

on a distributed, peer production model.
It is important initially to understand that the function of posting a story
from another site onto Slashdot, the first “utterance” in a chain of
comments on Slashdot, is itself an act of relevance production. The person
submitting the story is telling the community of Slashdot users, “Here is a
story that people interested in ‘News for Nerds’ should be interested in.”
This initial submission of a link is itself filtered by “authors” (really
editors), most of whom are paid employees of Open Source Development
Network (OSDN), a corporation that sells advertising on Slashdot and
customized implementations of the Slash platform. Stories are filtered out if
they have technical formatting problems or, in principle, if they are poorly
written or outdated. This segment of the service, then, seems mostly
traditional—paid employees of the “publisher” decide which stories are,
and which are not, interesting and of sufficient quality. The only peer
production element here is the fact that the initial trolling of the web for
interesting stories is itself performed in a distributed fashion. This
characterization nonetheless must be tempered, because the filter is
relatively coarse, as exemplified by the FAQ response to the question,
“How do you verify the accuracy of Slashdot stories?” A Slashdot editor
replied:

We don’t. You do. [] If something seems outrageous, we might

look for some corroboration, but as a rule, we regard this as the
responsibility of the submitter and the audience. This is why it’s
important to read comments. You might find something that
refutes, or supports, the story in the main.51

In other words, Slashdot is organized very self-consciously as a means

of facilitating peer production of accreditation; it is at the comments stage
that the story undergoes its most important form of accreditation—peer
review ex post.
And things do get a lot more interesting as one looks at the comments.
Slashdot allows the production of commentary on a peer-based model.
Users submit comments that are displayed together with the initial
submission of a story. Think of the “content” produced in these comments
as a cross between academic peer review of journal submissions and a peer-
produced substitute for television’s “talking heads.” It is in the means of
accrediting and evaluating these comments that Slashdot’s system provides
a comprehensive example of peer production of relevance and
accreditation.

51. Open Source Dev. Network, Inc., Slashdot FAQ: Editorial (Oct. 28, 2000), at
http://slashdot.org/faq/editorial.shtml.
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2002] Coase’s Penguin

Slashdot implements an automated system to select moderators from

the pool of users.52 Moderators are selected according to several criteria:
They must be logged in (not anonymous), they must be regular users
(average users, not one-time page loaders or compulsive users), they must
have been using the site for a while (this defeats people who try to sign up
just to moderate), they must be willing, and they must have positive
“karma.” Karma is a number assigned to a user that primarily reflects
whether the user has posted good or bad comments (according to ratings
from other moderators). If a user meets these criteria, the program assigns
the user moderator status and the user gets five “influence points” to review
comments. The moderator rates a comment of his choice using a drop down
list with words such as “flamebait” and “informative.” A positive word
increases the rating of a comment one point and a negative word decreases
the rating one point. Each time a moderator rates a comment, it costs the
moderator one influence point, so the moderator can only rate five
comments for each moderating period, which lasts for three days. If the user
does not use the influence points within the period, they expire. The
moderation setup is designed to give many users a small amount of
power—thus decreasing the effect of rogue users or users with poor
judgment. The site also implements some automated “troll filters,” which
prevent users from sabotaging the system. The troll filters prevent users
from posting more than once every sixty seconds, prevent identical posts,
and will ban a user for twenty-four hours if the user has been moderated
down several times within a short time frame.
Slashdot provides the users with a “threshold” filter that allows each
user to block lower-quality comments. The scheme uses a numerical rating
of the comment ranging from -1 to 5. Comments start out at 0 for
anonymous posters, 1 for registered users, and 2 for registered users with
good karma. As a result, if a user sets their filter at 1, the user will not see
any comments from anonymous posters unless the comment’s ratings were
increased by a moderator. A user can set their filter anywhere from -1
(viewing all of the comments) to 5 (viewing only the comments that have
been upgraded by several moderators).
Users also receive accreditation through their karma. If their posts
consistently receive positive ratings, their karma will increase. At a certain
karma level, their comments will start off with a rating of 2, thereby giving
them a louder voice, because other users with a threshold of 2 will now see
their posts immediately, and fewer upward moderations are needed to push
their comments even higher. Conversely, a user with bad karma from

52. The description in the following few paragraphs is mostly taken from the site’s frequently
asked questions page or from observations. See Open Source Dev. Network, Inc., Slashdot FAQ:
Comments and Moderation, at http://slashdot.org/faq/com-mod.shtml (last visited Sept. 1, 2002).
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consistently poor ratings can lose accreditation by having their posts

initially start off at 0 or -1. At the -1 level, the posts may not get moderated,
effectively removing the opportunity for the “bad” poster to regain karma.
Relevance, as distinct from accreditation, is also tied into the Slashdot
scheme because off-topic posts should receive an “off-topic” rating by the
moderators and sink below the threshold level (assuming the user has the
threshold set above the minimum). However, the moderation system is
limited to choices that sometimes are not mutually exclusive. For instance,
a moderator may have to choose between “funny” (+1) and “off topic” (−1)
when a post is both funny and off topic. As a result, an irrelevant post can
increase in ranking and rise above the threshold level because it is funny or
informative. It is unclear whether this is a limitation on relevance or rather
mimics our own normal behavior, say in reading a newspaper or browsing a
library, where we might let our eyes linger longer on a funny or informative
tidbit even after we’ve ascertained that it is not exactly relevant to what we
were looking for.
In addition to mechanizing means of selecting moderators and
minimizing their power to skew the aggregate judgment of the accreditation
system, Slashdot implements a system of peer review accreditation for the
moderators themselves. Slashdot implements this “meta-moderation” by
making any user who has an account from the first ninety percent of
accounts created on the system eligible to moderate the moderations. Each
eligible user who opts to perform meta-moderation review is provided with
ten random opportunities to rate moderators. The randomness helps to
prevent biases and control by anyone who might use the assignment process
to influence the selection of moderators. The user/meta-moderator may rate
the moderator as either unfair, fair, or neither. The meta-moderation process
affects the karma of the original moderator, which will remove the
moderator from the moderation system, if lowered sufficiently.
Together, these mechanisms allow for the distributed production of
both relevance and accreditation. Because there are many moderators who
can moderate any given comment and mechanisms that explicitly limit the
power of any one moderator to overinfluence the aggregate judgment, the
system evens out differences in evaluation by aggregating judgments. The
system then allows individual users to determine what level of accreditation
fits their particular time and needs by setting their filter to be more or less
inclusive. By introducing karma, the system also allows users to build
reputation over time and to gain greater control over the accreditation of
their own work relative to the power of the critics. Users, moderators, and
meta-moderators are all volunteers. Slashdot demonstrates that the same
dynamic that we observed for peer production of content can be
implemented to produce relevance and accreditation. Rather than using the
full-time effort of professional accreditation experts, the system is designed
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2002] Coase’s Penguin

to permit the aggregation of many small judgments, each of which entails a

trivial effort for the contributor. The software that mediates communication
among the collaborating peers also contains a variety of mechanisms
designed to defend the common effort from poor judgment or defection.

C. Value-Added Distribution

After considering content production along with relevance and

accreditation mechanisms, there remains the question of “distribution.” To
some extent this is a nonissue on the Internet. Distribution is cheap; all one
needs is a server and large pipes connecting the server to the world, and
anyone, anywhere, can get the information. I mention it here for two
reasons. First, there are a variety of value-adding activities that need to be
done at the distribution stage—like proofreading in print publication.
Although the author who placed the content on the Web will likely, for the
same motivations that caused him or her to put the materials together in the
first place, seek to ensure these distribution values, we have very good
examples of value-adding activities at the distribution stage being produced
on a peer production model. Second, as the Internet is developing, the
largest Internet Service Providers (ISPs) are trying to differentiate their
services by providing certain distribution-related values. The most obvious
examples are caching and mirroring—implementations by the ISP (caching)
or a third party like Akamai (mirroring) that insert themselves into the
distribution chain in order to make some material more easily accessible
than other material.53 The question is the extent to which peer distribution
can provide similar or substitute values.
The most notorious example is Napster.54 The collective availability of
tens of millions of hard drives of individual users provided a substantially
more efficient distribution system for a much wider variety of songs than

53. Part of the time lag involved in downloading materials is the time it takes for the
materials to traverse the network from their point of origin to the user’s computer. One approach
to speeding up communications is to store copies of popular materials close to users. When
Internet Service Providers do this, the function is called “caching,” which relates to temporary
storage of recently viewed files. See David D. Clark & Marjorie Blumenthal, Rethinking the
Design of the Internet: The End to End Arguments vs. the Brave New World, Paper Presented at
the Policy Implications of End-to-End Workshop, Stanford University, Dec. 1, 2000, at 15 (Aug.
10, 2000), at http://lawschool.stanford.edu/e2e/papers/TPRC-Clark-Blumenthal.pdf. Akamai is a
business that provides similar functionality, allowing content providers to purchase the
functionality independently of the decisions of an ISP. See AKAMAI, TURBO-CHARGING
DYNAMIC WEBSITES WITH AKAMAI EDGESUITE (2001), at http://www.akamai.com/en/
resources/pdf/Turbocharging_WP.pdf. So, for example, if CNN wants to be served quickly, but
AT&T Worldnet is not caching CNN, CNN can use the services of Akamai to “mirror” its site in
many important local markets so that whoever accesses the materials will receive more rapid
service.
54. See generally Salon Media Group, at http://dir.salon.com/topics/napster/ (last visited
Sept. 1, 2002) (collecting a variety of stories and explanations of the rise and fall of said dearly
departed).
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the centralized (and hence easier to control) distribution systems preferred

by the recording industry. The point here is not to sing the praises of the
dearly departed (as of this writing) Napster. Setting aside the issue of
content ownership, efficient distribution could be offered by individuals for
individuals. Instead of any one corporation putting funds into building and
maintaining a large server, end-users opened part of their hard drives to
make content available to others. Although Napster required a central
addressing system to connect these hard drives, Gnutella and other
emerging peer-to-peer networks do not.55 This is not the place to go into the
debate over whether Gnutella has its own limitations, be they scalability or
free-riding.56 The point is that there are both volunteers and commercial
software companies involved in developing software intended to allow
users to set up a peer-based distribution system that will be independent of
the more commercially controlled distribution systems, operating from the
edges of the network to its edges,57 rather than through a controlled
middle.58
Perhaps the most interesting, discrete, and puzzling (for anyone who
dislikes proofreading) instantiation of a peer-based distribution function is
Project Gutenberg and the site set up to support it, Distributed Proofreaders.
Project Gutenberg59 is a collaboration of hundreds of volunteers who scan
in and correct books so that they are freely available in digital form.
Currently, Project Gutenberg has amassed around 6300 public domain e-
texts through the efforts of volunteers and makes the collection available to
everyone for free.60 The e-texts are offered in ASCII format, which is the
lowest common denominator, making it possible to reach the widest
audience, but Project Gutenberg does not discourage volunteers from also
offering the e-texts in markup languages. It contains a search engine that

55. See Andy Oram, Gnutella and Freenet Represent True Technological Innovation,
O’REILLY NETWORK, May 12, 2000, at 3, at http://www.oreillynet.com/pub/a/network/2000/05/
12/magazine/gnutella.html.
56. See Eytan Adar & Bernardo A. Huberman, Free Riding on Gnutella, 5 FIRST MONDAY 1
(Oct. 2, 2000), at http://www.firstmonday.dk/issues/issue5_10/adar/. But see Clay Shirky, In
Praise of Free Loaders, O’REILLY NETWORK, Dec. 1, 2000, at http://www.oreillynet.com/pub/
a/p2p/2000/12/01/shirky_freeloading.html (contesting Adar and Huberman’s argument).
57. See Clay Shirky, Communities, Audiences, and Scale, at http://www.shirky.com/writings/
community_scale.html (last visited Nov. 4, 2002).
58. Eben Moglen has argued that peer distribution is dramatically better than proprietary
distribution, because social familiarity allows people to better guess their friends’ and
acquaintances’ preferences than a centralized distributor. If individuals are provided with the
freedom to give their friends music or any form of utterance that they believe they will like, the
information will arrive in the hands of most everyone who would want it within a very small
number of steps. Eben Moglen, The dotCommunist Manifesto: How Culture Became Property and
What We’re Going To Do About It, Lecture at the University of North Carolina, Chapel Hill
(Nov. 8, 2001), at http://www.ibiblio.org/moglen (video stream).
59. Project Gutenberg, at http://promo.net/pg/ (last visited Sept. 25, 2002).
60. See Ibiblio.org, at http://www.ibiblio.org/gutenberg/GUTINDEX.ALL (last visited Sept.
24, 2002) (including multiple versions of the same books as separate e-texts).
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2002] Coase’s Penguin

allows a reader to search for typical fields, such as subject, author, and title.
Distributed Proofreaders is a site that supports Project Gutenberg by
allowing volunteers to proofread an e-text by comparing it to scanned
images of the original book. The site is maintained and administered by one
person.
Project Gutenberg volunteers can select any book in the public domain
to transform into an e-text. The volunteer submits a copy of the title page of
the book to Michael Hart—who founded the project—for copyright
research. The volunteer is notified to proceed if the book passes the
copyright clearance. The decision on which book to convert to e-text is thus
left up to the volunteer, subject to copyright limitations. Typically, a
volunteer converts a book to ASCII format using OCR (optical character
recognition) and proofreads it one time in order to screen it for major errors.
The volunteer then passes the ASCII file to a volunteer proofreader. This
exchange is orchestrated with very little supervision. The volunteers use a
listserv mailing list and a bulletin board to initiate and supervise the
exchange. In addition, books are labeled with a version number indicating
how many times they have been proofed. The site encourages volunteers to
proof books that have low numbers. The Project Gutenberg proofing
process is simple and involves looking at the text itself and examining it for
errors. The proofreaders (aside from the first pass) are not expected to have
access to the book or scanned images, but merely review the e-text for self-
evident errors.
Distributed Proofreaders,61 a site unaffiliated with Project Gutenberg, is
devoted to proofing Project Gutenberg e-texts more efficiently by
distributing the volunteer proofreading function in smaller and more
information-rich modules. In the Distributed Proofreaders process, scanned
pages are stored on the site and volunteers are shown a scanned page and a
page of the e-text simultaneously so that the volunteer can compare the e-
text to the original page. Because of the fine-grained modularity,
proofreaders can proof one or a few pages and submit them. By contrast,
the entire book is typically exchanged on the Project Gutenberg site, or at
minimum a chapter. In this fashion, Distributed Proofreaders clears the
proofing of thousands of pages every month.
Interestingly, these sites show that even the most painstaking, some
might say mundane, jobs can be produced on a distributed model. Here the
motivation problem may be particularly salient, but it appears that a
combination of bibliophilia and community ties suffices (both sites are
much smaller and more tightly knit than, for example, the Linux kernel
development community). Individuals can self-identify as having a passion

61. Distributed Proofreaders, at http://charlz.dns2go.com/gutenberg/ (last visited Aug. 31,

2002).
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for a particular book or as having the time and inclination to proofread as

part of a broader project they perceive to be in the public good. By
connecting a very large number of people to these potential opportunities to
produce, the e-text projects, just like Clickworkers, Slashdot, or Amazon,
can capitalize on an enormous pool of underutilized intelligent human
creativity and willingness to engage in intellectual effort.

D. Summary

What I hope these examples provide is a common set of mental pictures

of peer production. In the remainder of the Article, I will abstract from
these stories some general observations about peer production: what makes
it work and what makes it better under certain circumstances than market-
or hierarchy-based production. But at this point it is important that the
stories have established the plausibility of, or piqued your interest in, the
claim that peer production is an existing phenomenon of much wider
application than free software. What remains is the interesting and difficult
task of explaining the phenomenon so as to begin to think about the policy
implications of the emergence of this strange breed in the middle of our
information economy. I will by no stretch of the imagination claim to have
completed this task in the following pages, but I hope to identify some basic
regularities and organizing conceptions that will be useful to anyone
interested in pursuing the answer. Even if you do not buy a single word of
my initial efforts to theorize the phenomenon, however, seeing these
disparate phenomena as instances of a general emerging phenomenon in the
organization of information production should present a rich topic of study
for organization theorists, anthropologists, institutional economists, and
business people interested in understanding new production models in a
ubiquitously networked environment.

II. WHY WOULD PEER PRODUCTION EMERGE IN A

NETWORKED ENVIRONMENT?

A. Locating the Theoretical Space for Peer Production

There are many places to attempt to provide a theoretical explanation of

peer production. One option would be to focus on the organization-of-
production literature that would be most sympathetic to the sustainability
and productivity of peer production. This might include the literature
regarding trust-based modes of organizing production62 or literature that

62. See, e.g., Paul S. Adler, Market, Hierarchy, and Trust: The Knowledge Economy and the
Future of Capitalism, 12 ORG. SCI. 215 (2001).
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focuses on internal motivation and its role in knowledge production.63

Perhaps it makes sense to focus on cultural or sociological characteristics of
peer communities as a central explanation of peer production, starting with
mainstream sociological and anthropological literature of gift-giving and
reciprocity.64 There are applications that are rather close both online65 and
offline,66 as well as in economic analysis of organization.67 The advantage
of doing so would be that these approaches have rich and detailed analytic
tools with which to analyze the phenomenon of peer production. The
disadvantage is that these approaches are outside the mainstream of
economic theory, which in turn looms large in discussions of law and
policy. In this early study of the phenomenon of peer production, it seems

63. See, e.g., Margit Osterloh & Bruno S. Frey, Motivation, Knowledge Transfer, and
Organizational Forms, 11 ORG. SCI. 538 (2000).
64. A very early exploration of gift exchange is Franz Boas, The Social Organization and the
Secret Societies of the Kwakiutl Indians, in ANNUAL REPORT OF THE U.S. NATIONAL MUSEUM
FOR 1895, at 311 (1897), available at http://www.canadiana.org/cgi-bin/ECO/mtq?doc=14300.
The locus classicus is MARCEL MAUSS, THE GIFT: THE FORM AND REASON FOR EXCHANGE IN
ARCHAIC SOCIETIES (W.D. Halls trans., W.W. Norton 1990) (1925). Valuable insight is also
provided by Marshall D. Sahlins, On the Sociology of Primitive Exchange, in THE RELEVANCE OF
MODELS FOR SOCIAL ANTHROPOLOGY 139 (Michael Banton ed., 1965) and CLAUDE LÉVI-
STRAUSS, THE ELEMENTARY STRUCTURES OF KINSHIP (James Harle Bell et al. trans., Beacon
Press 1969) (1967).
65. Indeed, this is central to Raymond’s discussion of open source development, see
RAYMOND, supra note 2, though it is not entirely clear that his description in fact fits the gift
literature, given how distant and potentially disconnected the act of giving in open source
communities is from the act of receiving.
66. In the offline world, the academic community has been described as thriving on shared
social commitments to the pursuit of truth, progress, and open collaboration. Science in particular
has been the subject of sociological analysis of a productive enterprise. Classics are BERNARD
BARBER, SCIENCE AND THE SOCIAL ORDER (1952), WARREN O. HAGSTROM, THE SCIENTIFIC
COMMUNITY (1965), and ROBERT K. MERTON, THE SOCIOLOGY OF SCIENCE (1973). Studies of
gift exchange flow from the 1925 fountainhead of Marcel Mauss. See MAUSS, supra note 64.
Work in this vein has followed both in anthropology and sociology. For a review of this literature
and its application to current debates over patenting basic research, see Arti Kaur Rai, Regulating
Scientific Research: Intellectual Property Rights and the Norms of Science, 94 NW. U. L. REV. 77
(1999).
67. This is not to say that there is no literature within economics that attempts to use the gift-
exchange literature to study economic phenomena. Examples are George A. Akerlof, Labor
Contracts as Partial Gift Exchange, 97 Q.J. ECON. 543 (1982) and Rachel E. Kranton, Reciprocal
Exchange: A Self-Sustaining System, 86 AM. ECON. REV. 830 (1996). See also JANET TAI LANDA,
The Enigma of the Kula Ring, in TRUST, ETHNICITY, AND IDENTITY: BEYOND THE NEW
INSTITUTIONAL ECONOMICS OF ETHNIC TRADING NETWORKS, CONTRACT LAW, AND GIFT-
EXCHANGE 141 (1994); Ernst Fehr et al., When Social Norms Overpower Competition: Gift
Exchange in Experimental Labor Markets, 16 J. LAB. ECON. 324 (1998).
The past few years have seen a particular emphasis on studying reciprocity itself as an
economic phenomenon. DAN M. KAHAN, THE LOGIC OF RECIPROCITY: A THEORY OF
COLLECTIVE ACTION AND LAW (forthcoming 2002); see also ERNST FEHR & KLAUS M.
SCHMIDT, THEORIES OF FAIRNESS AND RECIPROCITY: EVIDENCE AND ECONOMIC APPLICATIONS
(Inst. for Empirical Research in Econ., Working Paper No. 75, 2001), at http://www.unizh.ch/cgi-
bin/iew/pubdb2; BRUNO S. FREY & STEPHAN MEIER, PRO-SOCIAL BEHAVIOR, RECIPROCITY, OR
BOTH? (Inst. for Empirical Research in Econ., Working Paper No. 107, 2002), at
http://www.unizh.ch/cgi-bin/iew/pubdb2; Ernst Fehr & Armin Falk, Psychological Foundations of
Incentives, Schumpeter Lecture at the Annual Conference of the European Economic Association
(Nov. 2001), at http://www.unizh.ch/cgi-bin/iew/pubdb2.
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more important to establish its baseline plausibility as a sustainable and

valuable mode of production within the most widely used relevant analytic
framework than to offer a detailed explanation of its workings. Doing so
should provide wider recognition of the policy implications and create a
space for more methodologically diverse inquiries.
At the most general level, we can begin by looking at Ronald Coase’s
explanation of the firm in The Nature of the Firm and Harold Demsetz’s
explanation of property rights in Toward a Theory of Property Rights.68
Coase’s basic explanation of the emergence and relative prevalence of firms
focuses on the comparative costs of institutional alternatives. In other
words, Coase asked why clusters of individuals operate under the direction
of an entrepreneur, a giver of commands, rather than interacting purely
under the guidance of prices, and answered that using the price system is
costly. Where the cost of achieving a given outcome in the world through
the price system will be higher than the cost of using a firm to achieve the
same result, firms will emerge. Any given firm will cease to grow when the
increased complexity of its organization makes its internal decision costs
higher than the costs that a smaller firm would incur to achieve the same
marginal result. Firms will not, however, conduct activities if the cost of
organizing these activities within a firm exceeds the cost of achieving that
result through the market. Assuming that the cost of organization increases
with size, Coase posited that we have a “natural”—i.e., internal to the
theory—limit on the size and number of organizations.
Demsetz’s basic explanation of why property emerges with regard to
resources that previously were managed without property rights—as
commons—is based on a very similar rationale. As long as the cost of
implementing and enforcing property rights in a given resource is higher
than the value of the increase in the efficiency of utilization of the resource
gained by the introduction of a property regime, the resource will operate
without property rights. An increase in the value of the resource due to an
exogenous circumstance, such as a technological development or an
encounter with another civilization, may create a sufficient incentive for
property rights to emerge. More generally, property in a resource emerges if
the social cost of having no property in that resource exceeds the social cost
of implementing a property system in it. This restatement can include
common property regimes, managed commons, and other nonproperty
approaches to managing sustainable commons.69
Table 1 describes the interaction between Coase’s theory of the firm
and Demsetz’s theory of property.

68. Harold Demsetz, Toward a Theory of Property Rights, 57 AM. ECON. REV. 347 (1967).
69. For discussions of commons, see OSTROM, supra note 17; and Rose, supra note 17. A
brief discussion of these concepts as applied to peer production follows below. See infra notes
112-120 and accompanying text.
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TABLE 1. IDEAL ORGANIZATIONAL FORMS AS A FUNCTION OF

RELATIVE SOCIAL COST

Property system more Implementation costs of

valuable than property system higher
implementation costs1 than opportunity cost2
Market exchange of x
more efficient than Markets Commons
organizing x
Organizing x more
Common property
efficient than market Firms
regimes
exchange of x
1
A property system is “valuable” as compared to the option, and opportunity
costs, of not having property rights in place. The concept of the “value” of a
property system in the first column is equivalent to the “opportunity cost” of a
property system in the second column.
2
Both markets and firms generally rely on property rights. Therefore, the
institutions described in this column reflect functional equivalents for
decentralized exchange—markets—and coordinating organization—firms—in the
absence of property.

Before going into why peer production may be less costly than
property/market-based production or organizational production, it is
important to recognize that if we posit the existence of such a third option it
is relatively easy to adapt the transaction-costs theory of the firm and the
comparative institutional cost theory of property to include it. We would
say that when the cost of organizing an activity on a peered basis is lower
than the cost of using the market or hierarchical organization, then peer
production will emerge.70
We could tabulate as follows:

TABLE 2. IDEAL ORGANIZATIONAL FORMS AS A FUNCTION OF

RELATIVE SOCIAL COST INCLUDING PEER PRODUCTION

Property system more Implementation costs of

valuable than property system higher
implementation costs than opportunity cost
Market exchange of x Markets Commons

70. In the context of land, Ellickson extends Demsetz’s analysis in precisely this fashion,
suggesting that there may be a variety of reasons supporting group ownership of larger tracts,
including the definition of efficient boundaries, coping with significant shocks to the resource
pool, risk spreading, and the “advent of inexpensive video cameras or other technologies for
monitoring behavior within a group setting.” Robert C. Ellickson, Property in Land, 102 YALE
L.J. 1315, 1330, 1332-44 (1993).
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more efficient than (Farmers markets) (Ideas & facts; roads)

organizing or peering of x
Organizing x more Common property
Firms
efficient than market regimes
(Automobiles; shoes)
exchange or peering of x (Swiss pastures)
Peering of x more Proprietary “open source” Peer production
efficient than organizing efforts processes1
or market exchange of x (Xerox’s Eureka) (NASA Clickworkers)
1
“Cost” here would include the negative effects of intellectual property on
dissemination and downstream productive use.

Understanding that the same framework that explains the emergence of

property and firms could, in principle, also explain the emergence of peer
production focuses our effort on trying to understand why it is that peering
could, under certain circumstances, be a more cost-effective institutional
form than either markets or hierarchical organizations. Because the
emergence of peer production seems to be tied to the emergence of a
pervasively networked information economy, my explanation seeks to be in
some sense sensitive to (1) changes in the special characteristics of the
human and material resources used in information production relative to
other productive enterprises and (2) the cost and efficiency of
communication among human participants in the productive enterprise.

B. Peer Production of Information in a Pervasively

Networked Environment

Peer production is emerging as an important mode of information

production because of four attributes of the pervasively networked
information economy. First, the object of production—information—is
quirky as an object of economic analysis, in that it is purely nonrival,71 and
its primary nonhuman input is the same public good as its output—
information.72 Second, the physical capital costs of information production
have declined dramatically with the introduction of cheap processor-based
computer networks. Third, the primary human input—creative talent—is

71. A good is nonrival to the extent that its consumption by one person does not diminish its
availability for use by any other person. See, e.g., Paul M. Romer, Endogenous Technological
Change, 98 J. POL. ECON. S71, S73-S74 (1990). It has been commonplace for a long time to treat
information as a perfectly nonrival good. See id.; see also Kenneth J. Arrow, Economic Welfare
and the Allocation of Resources for Invention, in NAT’L BUREAU OF ECON. RESEARCH, THE RATE
AND DIRECTION OF INVENTIVE ACTIVITY: ECONOMIC AND SOCIAL FACTORS 609, 616-17 (1962).
72. While the input characteristic of information has been appreciated at least since 1962,
Arrow, supra note 71, the extensive exploration of the implications of this characteristic largely
begins with Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and
the Patent Law, 5 J. ECON. PERSP. 29 (1991).
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highly variable, more than traditional labor and certainly more than many
material resources usually central to production. Moreover, the individuals
who are the “input” possess better information than anyone else about the
suitability of their talents and their level of motivation and focus at a given
moment to given production tasks. Fourth, and finally, communication and
information exchange across space and time are much cheaper and more
efficient than ever before, which permits the coordination of widely
distributed potential sources of creative effort and the aggregation of actual
distributed effort into usable end products.
The first attribute—the public goods nature of information—affects the
cost of one major input into production—existing information. It means that
the social cost of using existing information as an input into new
information production is zero.73 This has two effects on the relative cost of
peer production of information.74 First, it lowers the expected private cost
of peer production of information, as compared to normal economic goods,
because in principle it means that a central input—preexisting
information—could be available to human productive agents without limit,
if the provisioning problem can be solved without introducing
appropriation. Second, it underlies a pervasive social cost of market and
hierarchy in this field of production because of the losses in both static and
dynamic efficiency entailed by the implementation of property rights in a
nonrival public good usually thought necessary to sustain market and
hierarchy-based production of information.75
The second attribute—the decline in physical capital cost—similarly
lowers the cost of another major cost of information production. The age of
mechanical reproduction that enabled fixation and distribution of
information and culture as goods was defined by the high cost of physical
capital. Large circulation automated printing presses, vinyl record and later
CD manufacturing facilities, and movie studios and their celluloid-based
systems formed the basis for the industrial model typical of information and
cultural production in the twentieth century. The declining cost of computer
processors coupled with the digitization of all forms of information and

73. Saying that the social cost of its use by one person is zero is simply another way of saying
that the good is nonrival—that its use by one person does not prevent its use by any other person.
74. The public goods aspect of information production is usually described as being
comprised of two distinct characteristics, its nonrivalry and its nonexcludability. See Romer,
supra note 71, at S73-S74. A good is excludable to the extent that its producer can exclude others
from its use unless they pay. If a good is not excludable, it too presents a problem for market
provisioning, not because it is inefficient to price it above zero, but because it is difficult to do so,
and hence firms will provide too little of it. Nonexcludability of information is less important to
the analysis here, because it does not relate to the characteristics of information that are important
to making peer production both feasible and efficient—that its most efficient price is zero and that
it can be used by any number of people without diminishing its availability for others.
75. See Arrow, supra note 71, at 617 (“[P]recisely to the extent that [property rights in
information] are successful, there is an underutilization of the information.”).
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culture has made the necessary physical capital cheaper by orders of

magnitude than in the past.
Together, these first two attributes make information production a
potentially sustainable low-cost, low-returns endeavor for many individuals
relying on indirect appropriation.76 It is important to note, however, that the
public goods attribute limits the applicability of my observations about peer
production, so that I make no claim about the applicability of these
observations to traditional economic goods.
The third characteristic—the centrality of human capital to information
production and its variability—is the primary source of efficiency gains
from moving from markets or hierarchical organization to peering.
Commons-based peer production creates better information about available
human capital and can better allocate creative effort to resources and
projects.
The fourth attribute—the dramatic decline in communications costs—
radically reduces the cost of peering relative to its cost in the material
world. This allows substantially cheaper movement of information inputs to
human beings, human talent to resources, and modular contributions to
projects, so that widely dispersed contributions can be integrated into
finished information goods. It also allows communication among
participants in peer production enterprises about who is doing what and
what needs to be done.

C. Markets, Hierarchies, and Peer Production as

Information-Processing Systems

Usually, the question of why anyone would contribute to a peer

production enterprise without directly appropriating the benefits is foremost
in people’s minds when I describe the phenomenon. For the sake of
completeness of the organization-theory argument, however, suspend
disbelief for one more section (or if you cannot do so, read Part III first, and
then come back here). Assume for the next ten pages that I have come up
with a reasonably plausible story as to why people participate, which will

76. “Indirect appropriation” is appropriation of the value of one’s effort by means other than
reliance on the excludability of the product of the effort. For example, someone who is paid as a
teacher but gets the position in reliance on his scholarship is indirectly appropriating the benefit of
his scholarship. An IBM engineer who gains human capital by working on GNU/Linux from
home in the evening is indirectly appropriating the benefits of her efforts in participating in the
production of GNU/Linux. The term is intended to separate out appropriation that is sensitive to
excludability of information—direct appropriation through intellectual property—and
appropriation that is independent of exclusion from the information—indirect appropriation
without intellectual property. See Yochai Benkler, Intellectual Property and the Organization of
Information Production, 22 INT’L REV. L. & ECON. 81, 87-88 (2002). As a general matter, the
more a sector of information production can be sustained through indirect appropriation, the less it
needs intellectual property.
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2002] Coase’s Penguin

allow us to consider the claim that if they did, their efforts would be more
productive than if they organized in a firm or interacted purely through a
price system.
Peer production has a relative advantage over firm- or market-based
production along two dimensions, both a function of the highly variable
nature of human capital. The first emerges when one treats all approaches
to organizing production as mechanisms by which individual agents reduce
uncertainty as to the likely value of various courses of productive action.77
Differences among these modes in terms of their information-processing
characteristics could then account for differences in their relative value as
mechanisms for organizing production. The second dimension consists of
allocation efficiencies gained from the absence of property. A particular
strategy that firms, and to a lesser extent markets, use to reduce uncertainty
is securing access to limited sets of agents and resources through contract
and property. This strategy entails a systematic loss of allocation efficiency
relative to peer production, because there are increasing returns to scale for
the size of the sets of agents and resources available to be applied to
projects and peer production relies on unbounded access of agents to
resources and projects.

1. Information Gains

We could reduce the decisions that must be made by productive human

beings as follows. Imagine a human agent (A), who is deciding whether and
how to act. An action (a) is a combination of two elements: the effort (e) to
be exercised and the resources (r) as to which the effort is exercised. An
agent sees a range of actions open to him that is a function of the range of
resources and effort levels that he can utilize. As information-collection
costs decline, agents see more of the universe of opportunities for action
that are available to them. Imagine that A is a rational actor,78 where the

77. Individuals who are presented with alternatives from which to choose, such as standing in
a particular spot and turning a lever all day or writing an economic analysis of friendship, do not
always know which of these courses of action is more valuable or which would allow them to put
dinner on the table. One can think of markets and firms as means by which individuals solve this
lack of knowledge, because they use signals about which action will better fulfill their purposes—
be they glory or subsistence. What follows, then, is in some measure a sketchy application of
Herbert Simon’s statement: “It is only because individual human beings are limited in knowledge,
foresight, skill, and time that organizations are useful instruments for the achievement of human
purpose . . . .” HERBERT A. SIMON, MODELS OF MAN 199 (1957). This individual-centric view of
organization treats the firm solely in terms related to the question of why agents use this form of
organization to order their individual productive behavior. I do not differentiate between
entrepreneurs, managers, and employees, but rather treat all of them as agents who have a set of
possible open courses of action.
78. A rational actor in the most traditional sense can be formalized within a framework that
strictly orders the value of outcomes of actions performed by agents who can calculate the values
of their preferences, outcomes, and the probabilities of outcomes vis-à-vis actions. For the limited
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private value (VA) to A of doing a is the expected value of the outcome (OA),
which is the value to A of OA obtaining, discounted by the probability that
OA will obtain if A does a. This means that the value to A of doing a
increases as the probability that doing a will result in OA obtaining
increases. That probability depends on the effort A will exert; the resources
available to A; A’s talent (t), where talent describes relative capabilities,
associations, and idiosyncratic insights and educational mixes of an
individual that make that person more or less productive with a given set of
resources for a given project; the presence of complementary actions by
other agents; and the absence of undermining actions by other agents.
A will do an using (en, rn) if A believes the value VAn to be higher than
either inaction or an alternative action. This requires that VAn be positive
relative to the value of inaction and higher than the value VAm—the value of
any other OAm similarly discounted by the probability that any other am,
combining any (em, rm), will lead to OAm obtaining. It is important to
underscore that the probability of OA obtaining is in some measure
dependent on the actions, both complementary and undermining, of other
agents. Assuming that the agent knows his or her own valuation of the
outcome, has some experience-based evaluation of t, and controls his or her
own effort, e, uncertainty resides primarily with regard to the divergence of
the private valuation of the outcome from its valuation by others, the
availability of r, and the interdependence of the agent’s action on the action
or inaction of others outside A’s control. Reducing these uncertainties is a
central function of markets and firms. Reducing the latter two in particular
is a central function of property and contract, which can secure
complementary material and human resources to increase the probability
that complementary actions will be taken and decrease the probability that
undermining actions will occur.
Markets and firm-based hierarchies are information processes in the
sense that they are means of reducing the uncertainty that agents face in
evaluating different courses of action to a level acceptable to the agent as
warranting action. Markets price different levels of effort and resources to
signal the relative values of actions in a way that allows individuals to
compare actions and calculate the likely actions of other individuals faced
with similar pricing of alternative courses of action. Firms reduce
uncertainty by specifying to some individuals what actions to take, thereby
reducing the uncertainty of interdependent action to a level acceptable to

purposes of comparing the information-processing characteristics of firms, markets, and peer

production, these rather strong characteristics are not necessary. It is enough to have individuals
that, in Simon’s terms, are satisficers. See id. at 204-05. The uncertainty as to the relative value of
a given action must be reduced to a level that satisfies the actor’s requirements to justify action,
without needing to calculate fully the various outcomes.
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the agents by delegating to the managers control over enough resources and
people by contract and property.
To compare modes of organizing production as information-processing
systems one might use the term information opportunity cost. I use the term
“information” here in the technical sense of a reduction in uncertainty,
where “perfect information” is the condition where uncertainty regarding an
action could not be further reduced in principle. Perfect information is
impossible to acquire, and different organizational modes have different
strategies for overcoming this persistent uncertainty. These strategies differ
from each other in the amount and kind of information they lose in the
process of resolving the uncertainty that rational agents face. The
divergence of each mode from the hypothetical condition of perfect
information—its lossiness—is that mode’s information opportunity cost.
Markets reduce uncertainty regarding allocation decisions by producing
a signal that is clear and comparable across different uses as to which use of
the relevant factors would be most efficient. To do so, markets require a
codification of the attributes of different levels of effort, different kinds of
resources, and different attributes of outcomes, so that these can all be
specified as contract terms to which a price is affixed. An example of this
was the introduction of codified standards for commodities as an
indispensable element of the emergence of commodities markets.79
Since we are concerned with individual agents’ decisions, and levels
and focuses of effort are a major component of individual action, it is
intuitive that specification and pricing of all aspects of individual effort as
they change in small increments over the span of an individual’s full day,
let alone a month, is impossible.80 What we get instead is codification of
effort types—a garbage collector, a law professor—that are priced more or
less finely. But one need only look at the relative homogeneity of law firm
starting salaries as compared to the high variability of individual ability and
motivation levels of graduating law students to realize that pricing of
individual effort can be quite crude. These attributes are also difficult to
monitor and verify over time, though perhaps not quite as difficult as
predicting them ex ante, so that pricing continues to be a function of
relatively crude information about the actual variability among people.

79. See ALFRED D. CHANDLER, JR., THE VISIBLE HAND: THE MANAGERIAL REVOLUTION IN
AMERICAN BUSINESS 211 (1977) (describing how commodity attributes became codified, and
local variability squelched, as a part of the transition to commodity markets).
80. In the context of the market for labor, this has sometimes been called the multitask
problem—the inability to specify completely by contract all the tasks required and all the
attributes of an employee who will likely need to perform multiple tasks. Bengt Holmstrom &
Paul Milgrom, Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and
Job Design, 7 J.L. ECON. & ORG. 24 (1991) (Special Issue); see also Bengt Holmstrom, The Firm
as a Subeconomy, 15 J.L. ECON. & ORG. 74, 89 (1999) (“The fact that [job] contingencies are
hard to specify ex ante makes the firm a potentially important operator of an internal human
capital market.”).
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More importantly, as aspects of performance that are harder fully to specify

in advance or monitor—like creativity over time given the occurrence of
new opportunities to be creative—become more important, market
mechanisms become more lossy.
Markets are particularly good at resolving the uncertainties with regard
to the difference in valuation of the outcome among different agents.
Therefore, an agent acting on a market price will have a relatively certain
evaluation of the external valuation of the outcome. Of course, this
valuation may be flawed because of externalities not reflected in the price,
but (for better or worse, depending on the magnitude and shape of
externalities) markets plainly reduce uncertainty about the value of an
action as perceived by others. Markets also reduce the uncertainty about the
availability of resources, by allowing an agent to compare the value of an
outcome to the price of necessary resources. Finally, markets reduce
uncertainties with regard to the actions of other agents in two ways. First,
agents can evaluate the risk that others will act in a way that is detrimental,
or fail to act in a way that is complementary, to the agent’s action, given the
relative pricing of the courses of complementary or detrimental action. This
risk assessment can then be built into the perceived value of a possible
action. Second, agents can maintain property rights in resources and
projects to prevent negatively correlated actions81 and contract with other
individuals to provide relatively secure access to resources for
complementary action.
Firms or hierarchical organizations resolve uncertainty by instituting an
algorithm or process by which information about which actions to follow is
ordered, so that some pieces of information count as a sufficient reduction
in uncertainty about the correct course of action to lead agents who receive
them to act. The mythical entrepreneur (or the historical manager) becomes
the sole source of information that is relevant to reducing the uncertainty of
the workers in a purely managed firm. In the ideal-type firm, uncertainty as
to which of a set of actions will increase an agent’s welfare is reduced by
fixing a salary for following a manager’s orders and shifting some of the
risk of that course of action from employees to employers. Production
processes—if I stand here and twist this lever all day, cars will emerge from
the other side and I will get a paycheck—are codified as instruction sets.
Agents reduce their uncertainty about why to act and what to do by
reducing the universe of information they deem relevant to their decision.

81. Maintaining rights in what I call “projects” is, on Kitch’s now-classic reading, the
primary function of the patent system. See Edmund Kitch, The Nature and Function of the Patent
System, 20 J.L. & ECON. 265 (1977). Even if one is critical of Kitch’s almost exclusive focus on
this characteristic as the reason for the patent system, recognizing that patents provide some
measure of control over projects is all that is necessary here. The derivative use right in copyright
plays a similar function to a more limited extent.
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2002] Coase’s Penguin

Information that arrives through a particular channel with a particular level

of authorization counts as a signal, and all the rest counts as noise. It
remains to the entrepreneur (in the pure model of the firm)82 to be the
interface between the firm and the market and to translate one set of
uncertainty-reducing signals—prices—to another set of signals with similar
effect—organizational commands.
By controlling a set of resources through property and commanding a
set of agents through the employment relationship, the firm reduces the
elements of uncertainty related to the interdependence of the actions of
agents. But by doing so it creates a boundary around the set of available
agents and the set of available resources that limits the information
available about what other agents could have done with these same
resources or what else these agents could have done with other resources.
This boundary therefore limits the efficacy of information-collection
mechanisms—like incentive-based contracts—that firms use to overcome
the difficulty of collecting information to which their employees have
special access.83
The point to see is that like the price system, hierarchical organization
is a lossy medium. All the information that could have been relevant to the
decision regarding each factor of production but that was not introduced in
a form or at a location that entitled it to “count” toward an agent’s decision
is lost. Much of the knowledge-management movement in business schools
and punditry since the mid-1990s has been concerned with mitigating the
lossiness of managerial hierarchy as an information-processing
mechanism.84 Mitigating this lossiness is the primary job of CIOs.85

82. A number of readers have complained that this picture of the firm is too thin to be a
realistic and complete description. Firms use all sorts of market-based mechanisms like incentive
compensation and internal arm’s length bargaining among units and mix market-based and
hierarchical control mechanisms to organize production. The point of my description, however, is
not to present a true sociological description of production in a firm. Coase’s transaction costs
theory of the firm identifies two dimensions to the process of allocating resources—pricing and
managerial commands—making it possible to map different organizations according to whether
and how they mix these ideal-type modes of coordinating the use of resources in production. I
present these two ideal types in their ideal form here, so as to clarify what is different about peer
production. Within this theory, peer production emerges as a third ideal type, to create a three-
dimensional space within which an organizational model can be described. In this model,
employee-of-the-month programs and employee-feedback sessions become simple precursors to
hybrids between firms and peer production processes, the most obvious example of which is
presented by Xerox’s Eureka.
83. Another problem with incentive-based contracts is that they may undermine voluntary
cooperation, a phenomenon related to the relationship between the presence of money and social-
psychological rewards discussed infra notes 101-105. See ERNST FEHR & SIMON GÄCHTER, DO
INCENTIVE CONTRACTS UNDERMINE VOLUNTARY COOPERATION? (Inst. for Empirical Research
in Econ., Working Paper No. 34, 2002), at http://www.unizh.ch/cgi-bin/iew/pubdb2.
84. For a range of definitions of knowledge management and a taste of the analytic styles, see
Brint.com, What Is Knowledge Management?, at http://www.brint.com/km/kmdefs.htm (last
visited Aug. 31, 2002).
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An example where peer production—proprietary, not commons-

based—was used precisely to solve the lossiness of hierarchical
organization is Xerox’s Eureka system for organizing the flow of questions
from, and answers to, field technicians about failures of photocopiers.86 The
firm created a decentralized communications system for technicians to post
questions, a peer review system for other technicians to answer these
questions, and a database library of past questions and answers available to
technicians who confront new problems. The original approach toward
technical failures of machines was to use manuals that came with the
machines, because the machine was conceptualized as being completely
engineered by the engineers, with all the possible failures specified in the
manual. Technicians were thus conceived of as instruction followers, who
came to machines that were broken, diagnosed the problem by locating it in
the manual, and then solved it by executing a series of corrective steps
prescribed by the manual.
The Eureka project changed the conception of the knowledge content of
the machine and the organizational role of technicians from instruction
followers to knowledge producers. In this system, a technician who came
across a problem not clearly resolved in the manual posted a question
electronically to a proprietary communications system accessible by all
technicians. Any other technician in the system who had come across a
similar problem could post a fix, which would be reviewed by experienced
technicians, who would opine on its advisability. The technician who used
the fix could then report on whether it worked. The whole transaction was
stored in a database of solutions. The technicians were not compensated for
answering queries but instituted instead a system of authorship and honor-
based payoffs. Eureka also flipped the traditional hierarchical conception of
knowledge in a machine as codified by engineers and implemented by
instruction-following technicians. The knowledge content of the machine
was now understood to be something that is incomplete when it leaves the
design board and is completed over the life of the machines by technicians
who share questions and solutions on a peer-review, volunteer model.
The Eureka project suggests one additional interpretation of peer
production in relation to markets and hierarchies. We generally understand
the existence of markets and hierarchies as two ideal models of
organization and observe various mixes of the two types in actual
organizational practices. Eureka suggests that peer production can be a third
ideal-type organizational model, which can be combined in various

85. CIOs are “Chief Information Officers,” a position created to reduce information loss
within organizations.
86. See Daniel G. Bobrow et al., Community Knowledge Sharing in Practice, at
http://jonescenter.wharton.upenn.edu/VirtualCommunities/whalen.pdf (last visited Aug. 31,
2002).
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2002] Coase’s Penguin

measures with the other two, forming a three-dimensional map of

organizational strategies rather than the two-dimensional map recognized
traditionally.
Recognizing the lossiness of markets and managerial hierarchies
suggests the first portion of a working hypothesis about why peer
production has succeeded in gaining ground, namely the possibility that
peer production may have lower information opportunity costs than markets
or hierarchies. In particular, I suggest that the primary source of gains—
which may be called information gains—that peer production offers is its
capacity to collect and process information about human capital. The
hypothesis is that rich information exchange among large sets of agents free
to communicate and use existing information resources cheaply will create
sufficiently substantial information gains that, together with the allocation
gains that I will discuss in the following Section, overcome the information-
exchange costs due to the absence of pricing and managerial direction and
the added coordination costs created by the lack of property and contract.
Where the physical capital costs of information production are low and
where existing information resources are freely or cheaply available,87 the
low cost of communication among very large sets of agents allows agents to
collect information through extensive communication and feedback instead
of using information-compression mechanisms like prices or managerial
instructions. If communications include a sufficiently large number of
agents operating in the same resource and opportunity sets, this mode of
communication can provide to each agent rich information about what
needs to or can be done, who is doing what, and how other people value
any given outcome. One sees this phenomenon in the centrality of effective
communications platforms to the design of peer production processes—be
they simple lists that lie at the heart of every free software development
project88 or the sophisticated collaboration platforms that underlie projects
like Slashdot or Kuro5hin. The value of these systems is precisely in
enabling agents to use extensive information exchange and feedback to
provide the same desiderata that prices and managerial commands provide
in their respective models.

87. By limiting the hypothesis to information production under conditions of cheap and
widely available physical capital (computers) and relatively free availability of information inputs,
we can largely ignore uncertainty as to the availability of material resources, because the domain
of application of the hypothesis relates to conditions where resources other than human creativity
are not scarce, so that uncertainty as to their availability is minimal.
88. At the heart of the distributed production system that is typified by open source software
development is the notion of making the program available in a publicly accessible space for
people to comment on and upgrade. See RAYMOND, supra note 9, at 26-28. These communication
lists have also offered a valuable location for observers of the phenomenon to gain insight. See,
e.g., Karim R. Lakhani & Eric von Hippel, How Open Source Software Works: “Free” User-to-
User Assistance, 32 RES. POL’Y (forthcoming 2003) (describing support lists for Apache),
available at http://opensource.mit.edu/papers/lakhanivonhippelusersupport.pdf.
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Platform design and maintenance, and more importantly the human

attention required to take in and use this information, are the equivalent for
peer production of organization and decision costs in firms and of
transaction costs in markets. The magnitude of these costs will partly be a
function of the quality of the design of the collaboration platform in terms
of efficiency of communication and information-processing utilities. This
rich information exchange may or may not be efficient, depending on the
magnitude of the cost and the relative information gains generated by the
richer information available to agents through this system.
Reducing uncertainty about the availability of opportunities for action
by any given agent and about complementary actions by other agents
becomes the salient potential source of information gain for peer production
projects, while the capacity of a project to reduce the likely prevalence or
efficacy of undermining actions becomes a major limiting factor. This latter
effect, most obviously typified by the information-rich process of peer
review, will occupy a substantial portion of Part III, where I will discuss in
some detail the threats to effective peer production and the mechanisms
available to this mode of production to defend itself from incompetence and
defection. Here I will focus on the information gains generated by peer
production in terms of opportunities both for creative and for novel
utilization of existing resources89 and opportunities agents have to use their
own talents, availability, focus, and motivation to perform a productive act.
Central to my hypothesis about the information gains of peer
production is the claim that human intellectual effort is highly variable and
individuated. People have different innate capabilities, personal, social, and
educational histories, emotional frameworks, and ongoing lived
experiences. These characteristics make for immensely diverse associations
with, idiosyncratic insights into, and divergent utilization of, existing
information and cultural inputs at different times and in different contexts.
Human creativity is therefore very difficult to standardize and specify in the
contracts necessary for either market-cleared or hierarchically organized
production. As human intellectual effort increases in importance as an input
into a given production process, an organization model that does not require
contractual specification of effort but allows individuals to self-identify for
tasks will be better at gathering and utilizing information about who should
be doing what than a system that does require such specification. Intra-firm
hybrids, like incentive compensation, may be able to improve on firm-only
or market-only approaches, but it is unclear how well they can overcome

89. This is a point Bessen makes about complex software, see Bessen, supra note 12, as well
as a characteristic of the motivation Raymond describes as having an itch to scratch, RAYMOND,
supra note 9, at 23 (“Every good work of software starts by scratching a developer’s personal
itch.”).
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2002] Coase’s Penguin

the core difficulty of requiring significant specification of the object of

organization and pricing—in this case, human intellectual input.
The point here is qualitative. It is not only, or even primarily, that more
people can participate in production. The widely distributed model of
information production will better identify who is the best person to
produce a specific component of a project, all abilities and availability to
work on the specific module within a specific time frame considered. With
enough uncertainty as to the value of various productive activities and
enough variability in the quality of information inputs and human creative
talent vis-à-vis any set of production opportunities, coordination and
continuous communications among the pool of potential producers and
consumers can generate better information about the most valuable
productive actions and the best human agents available at a given time.
Although markets and firm incentive schemes are aimed at producing
precisely this form of self-identification, the rigidities associated with
collecting and comprehending bids from individuals through these systems
(i.e., transaction costs) limit the efficacy of self-identification, relative to
peer production.
Now, self-identification is not always perfect, and some mechanisms
used by firms and markets to codify effort levels and abilities—like formal
credentials—are the result of experience with substantial errors or
misstatements by individuals about their capacities. To succeed, therefore,
peer production systems must also incorporate mechanisms for smoothing
out incorrect self-assessments, like peer review in traditional academic
research or the major sites like Slashdot or Kuro5hin, or like redundancy
and statistical averaging in the case of NASA Clickworkers. In information
terms, these mechanisms reduce the uncertainty associated with the likely
presence of undermining actions by other agents. The prevalence of
misperceptions that agents have about their own abilities and the cost of
eliminating such errors will be part of the transaction costs associated with
this form of organization that are parallel to quality control problems faced
by firms and markets. This problem is less important where the advantage
of peer production is in acquiring fine-grained information about
motivation and availability of individuals who have otherwise widely
available capabilities—like the ability to evaluate the quality of someone
else’s comment on Slashdot. It is likely more important where a particular
skill set is necessary that may not be widespread—like the programming
skills necessary to fix a bug in a program.

2. Allocation Gains

In addition to its potential information gains, peer production has

potential allocation gains enabled by the large sets of resources, agents, and
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projects available to peer production. This gain is cumulative to the general

information-processing characteristics of peer production and is based on
the high variability of human capital, which suggests that there are
increasing returns to the scale of the pool of individuals, resources, and
projects to which they can be applied.
As illustrated in Figure 1(a), market- and firm-based production
processes rely on property and contract to secure access to bounded sets of
agents and resources in the pursuit of specified projects. The permeability
of the boundaries of these sets is limited by the costs of making decisions in
a firm about adding or subtracting a marginal resource, agent, or product
and the transaction costs of doing any of these things through the market.
Peer production relies on making an unbounded set of resources available
to an unbounded set of agents, who can apply themselves toward an
unbounded set of projects. The variability in talent and other idiosyncratic
characteristics of individuals suggests that any given resource will be more
or less productively used by any given individual and that the overall
productivity of a set of agents and a set of resources will increase when the
size of the sets increases toward completely unbounded availability of all
agents to all resources for all projects. Even if in principle the
decisionmaker has information as to who is the best person for a job given
any particular set of resources and projects (in other words, if the
information gains are assumed away), the transaction or organizational
costs involved in bringing that agent to bear on the project may be too great
relative to the efficiency gain over use of the resource by the next-best
available agent who is within the boundary.
Assume that the productivity (PA) of a set of agents/resources is a
function of the agents (A) available to invest effort (e) on resources (r). The
productivity of Agent A1 (PA1)90 is a function of the set of resources on
which A1 can work (r1), the level of effort A1 will invest (e1), and A1’s talent
(t1). PA increases as a function of e, r, and the actions of other
complementary agents and decreases by undermining actions of agents at a
magnitude that is a function of t. Note that t is a personal characteristic of
individuals that is independent of the set of resources open for A to work
on, but will make a particular A more or less likely to be productive with a
given set of resources in collaboration with other agents for the
achievement of a set of outcomes. A’s access to any given set of resources
and potential collaborators therefore represents a probability, which is a

90. While VA discussed in the previous Section related to the private value of an action to an
agent, PA is intended to represent the potential social value of the efforts of any one or more
agents A as part of a potential collaborative effort.
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2002] Coase’s Penguin

function of t, that A will be productive with that resource and those

collaborators for a given project.91
The existence of t generates increasing returns to scale of the set of
resources and to the set of agents to which it is available, because the larger
the number of agents with access to a larger number of resources, the higher
the probability that the agents will include someone with a particularly high
t for productive use of a given rn at a given en as compared to other agents.
Imagine a scenario where A1 works for Firm F1 and has a higher t value as
regards using r2 than A2 who works for Firm F2. If r2 is owned by F2, r2 will
be used by the less efficient A2, so long as the value of A2 working on r2 is
no less than the value of A1 working on r2 minus the transaction costs
involved in identifying the relative advantage of A1 and assigning A1 to
work on r2. This potential efficiency loss would be eliminated if A1 were in
the set of agents who had transaction-cost-free access to work on the
resource set that includes r2.

If Firms F1 and F2 each have a set of agents and resources,

{AF1, rF1} and {AF2 ,rF2}, then PF1 + PF2 < PF1+F2.

Figures 1(a) and 1(b) illustrate the point with another example. Figure
1(a) assumes that there are two firms, each having contracts with a set of
agents and property in a set of resources. Assume that as among {A1 . . . A5}
in Firm F1 the best agent for using the combination (r1, r4) is A2. Assume
also that as among the agents {A1 . . . A9}, A8 is the best, in the sense that if
A8 were to use these resources, the social value of the product would be
greater by some measure (m) than when A2, the best agent within Firm F1,
uses them.
It is unlikely that the two firms will have the information that A8 is best
for the job, as I suggested in the discussion of information gains. Even if
they do know, creativity will be misapplied as long as the transaction costs
associated with transferring the creativity of A8 to Firm F1 or the property in
r1 and r4 to Firm F2 are greater than m. When the firms merge, or when the
agents and resources are in a commons-based peer production enterprise
space, the best person can self-identify to use the resources, as in Figure
1(b). Think of this as someone musing about fairy tales and coming up with
a biting satire, which she is then capable of implementing, whereas the
employee of the initial owner of the rights to the fairy tale might only
produce a depressingly earnest new version.

91. In seeking to identify the private value of an outcome to an agent above, I described the
successful completion of a project as an outcome OA, discounted by the probability q of OA
obtaining should A do a. PA is the social equivalent of qOA to the individual, representing a
judgment of whether an individual will be productive.
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This initial statement is a simplification and understatement of the

potential value of the function by which the sizes of the sets of agents and
resources increase productivity. There are two additional components: the
range of projects that might be pursued with different talent applied to a
given set of resources and the potential for valuable collaboration. First, a
more diverse set of talents looking at a set of resources may reveal available
projects that would not be apparent when one only considers the set of
resources as usable by a bounded set of agents. In other words, one of the
advantages may be not the ability of A1 to pursue a given project with r2
better than A2 could have but the ability to see that a more valuable project
is possible. Second, the initial statement does not take into consideration the
possible ways in which cooperating individuals can make each other
creative in different ways than they otherwise would have been. Once one
takes into consideration these diverse effects on the increased possibilities
for relationships among individuals and between individuals and resources,
it becomes even more likely that there are increasing returns to scale to
increases in the number of agents and resources involved in a production
process.
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2002] Coase’s Penguin

FIGURE 1. APPLYING AGENTS TO RESOURCES

(a) Separated in Different Firms

Firm F1
A1 r1 r
A2 2
A3 r3
A4 A5 r4
r5
Firm F2
A6 r6
A7 r7
A8 r8
A9 r9

(b) In a Common Enterprise Space

Peer Production
A1 Community
r1 r
A2 2
A3 r3
A4 A5 r4
r5

A6 r6
A7 r7
A8 r8
A9 r9
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Assume, for example, that every agent, given a t value, has some
potential ability to use every resource, which could be measured as an
option for that agent on that resource. (In other words, its value is derived
from the value of the agent using the resource well, discounted by the
probability that the agent will be good at using the resource.) Assume also
that every agent has some potential to add value in collaboration with any
other agent, and that every resource could have some potential value in
combination with any other resource. If we have one agent, A1, and one
resource, r1, we only get the value of the option of A1 using r1. If we add
one more resource, we get the value of A1 using r1, A1 using r2, and A1 using
r1 in combination with r2. Symmetrically, if we keep the resource set fixed
at one resource but add an agent, because the resources are nonrival, we
would see the value of two agents and one resource as the sum of the values
of A1 using r1, A2 using r1, and a collaboration between A1 and A2 to use r1.
If we combine adding one agent and one resource, we see the following.
The value of {A1, r1} + {A2, r2}, if the two sets are strictly separated, is the
value of A1 using r1 and A2 using r2. The value of {A1, A2, r1, r2} in a single
agent/resource space is the combined value of A1 using r1 and A2 using r2,
A1 using r2 and A2 using r1, A1 using r1 and r2 and A2 using r1 and r2, A1 and
A2 collaborating to use r1, A1 and A2 collaborating to use r2, and A1 and A2
collaborating to use r1 and r2.92
Figure 2 illustrates this point. Each arrow identifies one potential option
for a valuable combination of agents and resources. In Figure 2(a), we see
that separating the two agents and resources results in a combined value of
only two options. Figure 2(b) shows the three combinations of a single
agent with two resources. Likewise, Figure 2(c) represents the three options
associated with two agents and one resource. In Figure 2(d), we see that,
once both agents and resources are placed in the same opportunity set, the
number of options for use and collaboration increases dramatically, with
each arrow representing one of the nine potentially valuable combinations
of agents and resources that the single agent-resource space makes possible.

92. I am not sure there is room to formalize the precise relationship here on the style of
Metcalfe’s Law or Reed’s Law. See David P. Reed, That Sneaky Exponential—Beyond
Metcalfe’s Law to the Power of Community Building, at http://www.reed.com/Papers/GFN/
reedslaw.html (last visited Aug. 31, 2002). From a policy perspective, there is no need to do so at
this early stage of studying the phenomenon. It is sufficient for our purposes here to see that the
collaboration effects and insights due to exposure to additional resources mean that the returns to
scale are, as with other networks, more than proportional.
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FIGURE 2. AGENT AND RESOURCE COMBINATIONS

(a) Bounded Sets of One Agent and One Resource

A1 r1

A2 r2

(b) One Agent Combined with Two Resources

A1 r1

r2
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(c) Two Agents Combined with One Resource

A1 r1

A2

(d) Two Agents Combined with Two Resources

A1 r1

A2 r2
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2002] Coase’s Penguin

If this is true, then in principle a world in which all agents can act
effectively on all resources will be substantially more productive in creating
information goods than a world in which firms divide the universe of agents
and resources into bounded sets. As peer production relies on opening up
access to resources for a relatively unbounded set of agents, freeing them to
define and pursue an unbounded set of projects that are the best outcome of
combining a particular individual or set of individuals with a particular set
of resources, this open set of agents is likely to be more productive than the
same set could have been if divided into bounded sets in firms. Note that
the effect changes dramatically when the resources are rival, because the
value of any agent or combination of agents working on the resource is not
additive to the value of any other agent or combination. In other words, the
use of a rival resource excludes the use by others in a way that is not true
for a purely nonrival good like information. The allocation gain is attained
in allocating the scarce resource—human attention, talent, and effort—
given the presence of nonrival resources to which the scarce resource is
applied with only a probability of productivity.
This is not to say that peer production will always necessarily be more
productive or that it will always improve with size. First, adding agents may
increase coordination and communication costs and heighten the probability
that the set of agents will include individuals whose actions, through
incompetence or malice, will undermine the productivity of the set.
Second, in situations where focused but relatively standardized effort is
more important than variability of talent, well-understood incentive systems
based on monetary rewards could outweigh this effect, and markets and
firms are much better understood mechanisms to generate the incentives for
such an application of effort than is peer production. Even in these
situations, however, monetary incentives will not necessarily be more
efficient, even if better understood. If a project can be structured to resolve
the effort/incentives problem without appropriation of the output, as I
describe in Part III, the substantial increases in productivity resulting from
the availability of a larger set of resources to a larger set of agents with
widely variable talent endowments could be enough to make even an
imperfectly motivated peer production process more productive than firms
that more directly motivate effort but segment agents and resources into
smaller bounded sets. Moreover, as Section III.A explains, a peer
production project could increase, rather than decrease, motivation by
eliciting contributions motivated by nonmonetary rewards when monetary
rewards would have been either ineffective or inefficient.
And third, as unbounded sets of agents utilize unbounded sets of
resources for unbounded sets of projects, there is likely to be substantial
duplication of effort. This duplication is wasteful if one considers actual
likely patterns of peer production as compared to an idealized peer
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production system where everyone self-identifies perfectly for the one

contribution that they are best suited to produce. The question then becomes
one of comparative efficiency: How much of a drag is duplication on the
claimed increased efficiency provided by peer production enterprises? The
answer has two primary components. First, as Part III will elaborate, peer
production draws effort that in many cases would otherwise have been
directed toward purely nonproductive consumption—say, watching
television instead of marking craters on Mars, ranking websites for the
Open Directory Project, or authoring entries for Wikipedia. On a
macrolevel of social productivity, then, it enables an economic system to
harness activities from which agents gain welfare to peer production efforts
that also generate innovation and welfare for others. While duplication may
limit the total value of this newly tapped source of productivity, it is less
important to the extent that the duplication occurs among efforts that would,
in the absence of a peer production system, have gone unused in the
production system. Second, and probably more important, redundancy
provides important values in terms of the robustness and innovativeness of
a system. Having different people produce the same component makes the
production system more resistant to occasional failures. Moreover, having
different people with different experience and creative approaches attack
the same problem will likely lead to an evolutionary model of innovation
where alternative solutions present themselves, thus giving the peer
production process the ability to select among a variety of actual solutions
rather than precommitting to a single solution.

III. OF MOTIVATION AND ORGANIZATION: THE COMMONS PROBLEM

A. The “Incentives” Problem: Of Diverse Motivations and

Small Contributions

What makes contributors to peer production enterprises tick? Why do

they contribute? There are two versions of this question. The first is the
question of the economic skeptic. It questions the long-term sustainability
of this phenomenon, given that people will not, after the novelty wears off,
continue to work on projects in which they can claim no proprietary
rights.93 It is to this question that my discussion here responds, in an effort
to show that the network as a whole can be a sustainable system for the
production of information and culture. There is a second, narrower version

93. This skepticism is more often encountered in questions in conferences and presentations
than in formal papers. A well-articulated written example of a skeptic’s view, however, is Glass,
supra note 11, comparing recruiting operating system developers to Tom Sawyer’s whitewashing
the fence trick and arguing that eventually operating system efforts will die because too many
important programming tasks are not fun/sexy enough.
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2002] Coase’s Penguin

of the question, which arises once one overcomes the skepticism and begins
to consider how peer production can be steered or predicted. It would seek
to understand the motivations and patterns of clustering around projects in
the absence of property rights and contracts and the emergence of the
effective networks of peers necessary to make a particular project succeed.
These are questions that present rich grounds both for theoretical and
empirical study. My hunch is that these would best be done informally in
the domains of social psychology and anthropology, or, if done formally,
through artificial life-type modeling. They are, in any event, beyond the
scope of this initial study, which is intended solely to define the
phenomenon and assess its sustainability and welfare effects in general
terms.
As a practical matter, the incentive problem as an objection to the
general sustainability of peer production is in large part resolved by the
existence of a series of mechanisms for indirect appropriation of the
benefits of participation catalogued quite comprehensively by Lerner and
Tirole.94 At the broadest level, there is the pleasure of creation. Whether
you refer to this pleasure dispassionately as “hedonic gain” or romantically
as “an urge to create,” the mechanism is simple. People are creative beings.
They will play at creation if given an opportunity, and the network and free
access to information resources provide this opportunity.95 More closely
related to the project of keeping body and soul together, there is a variety of
indirect appropriation mechanisms for those who engage in free software
development. These range from the amorphous category of reputation

94. Lerner & Tirole, supra note 10.

95. Moglen makes this central to his explanation in Anarchism Triumphant as follows:
It’s an emergent property of connected human minds that they create things for one
another’s pleasure and to conquer their uneasy sense of being too alone. The only
question to ask is, what’s the resistance of the network? Moglen’s Metaphorical
Corollary to Ohm’s Law states that the resistance of the network is directly
proportional to the field strength of the “intellectual property” system.
....
So, in the end, my dwarvish friends, it’s just a human thing. Rather like why
Figaro sings, why Mozart wrote the music for him to sing to, and why we all make up
new words: Because we can. Homo ludens, meet Homo faber.
Moglen, supra note 21. Raymond, as well as Lerner and Tirole, also offer hedonic gains as one
component of their respective explanations. RAYMOND, supra note 2, at 13-14; Lerner & Tirole,
supra note 10, at 213. There is, of course, something counterintuitive about calling hedonic
pleasure “indirect” appropriation. I use the terms “direct” and “indirect” to distinguish between
appropriation that relies directly on the economic exclusion made possible by intellectual property
law and all other forms of appropriation. Direct appropriation supports the claim that intellectual
property rights can increase information production, while indirect appropriation undermines the
claim. On why it is that these two types of appropriation have this oppositional relationship as
insights into the utility of the intellectual property rights, see Benkler, supra note 76 (explaining
that intellectual property has positive effects on information-production strategies that are based
on direct appropriation and negative effects on information-production strategies that rely on
indirect appropriation, and that these effects will structure the organization of information
production and its efficiency even when they have no effect on aggregate productivity in
information production).
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gains96 to much more mundane benefits, such as consulting contracts,

customization services, and increases in human capital that are paid for by
employers who can use the skills gained from participation in free software
development in proprietary projects. In this regard, it is important to note
that about two-thirds of the revenues in the software industry are not tied to
software publishing, but to service-type relationships.97 Given that two-
thirds of the revenues of the software industry are service-based and that the
total revenues of the software industry are three times the size of the movie,
video, and sound-recording industries combined,98 indirect appropriation
offers a rich field of enterprise for participants in free software
development.
The reality of phenomena like academic research, free software, the
World Wide Web, NASA Clickworkers, and Slashdot supports these
explanations with robust, if not quantified here, empirical grounding. All
one need do is look at the Red Hat founders (no longer billionaires, but not
quite on the bread line either)99 and IBM’s billion-dollar commitment to

96. But, as mentioned above, this commonly cited motivation has not been reconciled with
the contrary practices of two of the most successful free software projects, Apache and the Free
Software Foundation, neither of which provides personal attribution to code they bless. See supra
note 7.
97. The Economic Census of 1997 breaks up software into several categories, ranging from
publishing to different types of services and education. Nonetheless, it is possible to collect the
information about the industry as a whole using primarily the following three categories: software
publishing (NAICS 5112), computer systems design and related services (NAICS 5415), and
computer training (NAICS 61142). See U.S. CENSUS BUREAU, ECONOMIC CENSUS OF 1997, at
http://www.census.gov/epcd/ec97/us/US000.HTM [hereinafter ECONOMIC CENSUS OF 1997].
Software publishing had receipts of more than $61 billion (35%), computer systems design and
related services roughly $109 billion (63%), and computer training roughly $2.5 billion (1.4%).
Id.
The Economic Census of 1997 divides computer systems design and related services into a
number of subcategories: custom computer programming services (NAICS 541511, $38 billion);
computer systems design services (NAICS 541512, $51 billion); computer facilities management
services (NAICS 541513, $15 billion); and other computer related services (NAICS 541519, $4.3
billion). Id. Finally, computer systems design services is further subdivided into computer systems
integrators (NAICS 5415121, $35 billion) and computer systems consultants (NAICS 5415122,
$16 billion). Id. The Economic Census defined computer systems design and related services as
follows:
This industry comprises establishments primarily engaged in providing expertise in the
field of information technologies through one or more of the following activities: (1)
writing, modifying, testing, and supporting software to meet the needs of a particular
customer; (2) planning and designing computer systems that integrate computer
hardware, software, and communication technologies; (3) on-site management and
operation of clients’ computer systems and/or data processing facilities; and (4) other
professional and technical computer-related advice and services.
U.S. Census Bureau, NAICS 54151: Computer Systems Design and Related Services, at
http://www.census.gov/epcd/ec97/def/54151.HTM (last visited Oct. 27, 2002).
98. The movie, video, and recording industries (NAICS 512) had total receipts of roughly
$56 billion, as compared to roughly $173 billion for the software industry. ECONOMIC CENSUS OF
1997, supra note 97.
99. Red Hat is a company that specializes in packaging and servicing GNU/Linux operating
systems. In 1999, it had an immensely successful IPO that made its founders billionaires, for a
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2002] Coase’s Penguin

supporting Linux and Apache, on the one hand, and the tens of thousands of
volunteer clickworkers, thousands of Linux developers, and hundreds of
distributed proofreaders, on the other hand, to accept intuitively that some
combination of hedonic gain and indirect appropriation can resolve the
incentives problem. In this Part, I abstract from this intuitive observation to
offer an answer that is more analytically tractable and usable to understand
the microanalytic questions of peer production and the potential range in
which peer production will be more productive than firms or markets.

1. Abstracting the Effect of Diverse Motivations

Saying that people participate for all sorts of reasons is obviously true
at an intuitive level. It does not, however, go very far toward providing a
basis for understanding why some projects draw many people, while others
fail, or how the presence or absence of money affects the dynamic. What I
will try to do in this Subsection is propose a framework to generalize the
conditions under which peer production processes will better motivate
human effort than market-based enterprises. Given the discussion of the
information and allocation gains offered by peer production, this Subsection
outlines a range in which peer production should be more productive than
market-based or firm-based production. At the broadest level, wherever
peer production can motivate behavior better than markets or firms, then
certainly it will be superior. It will also be potentially better over a range
where it may motivate behavior less effectively than markets or firms, but
the contribution of the lower overall effort level will be less than the
contribution of the added value in terms of information about, and
allocation of, human creativity.
Let any agent have a set of preferences for rewards of three types:

M → Monetary rewards, which decrease in value because of the

decreasing marginal utility of money. Call the rate at which
M decreases s (satiation).

H → Intrinsic hedonic rewards experienced from taking the

actions.

SP→ Social-psychological rewards, which are a function of the

cultural meaning associated with the act and may take the
form of actual effect on social associations and status
perception by others or on internal satisfaction from one’s

while. The company, however, survived the bursting of the dot-com bubble and continues to lead
the field of Linux distributions.
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social relations or the culturally determined meaning of one’s

action.

At an intuitive level, three common examples help to clarify this

diversity of motivation. Simplest to see is how these motivations play out
with regard to sex: the prostitution fee (M), the orgasm (H), and love (SP).
One can also make and serve dinner to others for any combination of a fee
(M), the pleasure of cooking (H), and companionship (SP). The
combination of these interacting motivations shapes our understanding of
whether we are observing a short-order cook, a restaurant chef, or a dinner
party host. Similarly, one can write about law for a legal fee (M), the
pleasure of creating a well-crafted argument (H), or the respect of the legal
community or one’s colleagues (SP). To some extent, all three exist for
anyone writing, but in different measures partly depending on taste and
partly depending on social role, such as whether the author is a practitioner,
a judge, or an academic, as well as on other factors, such as external time
constraints.
The value of the three types of rewards for any given action might be
independent of the value of the others, or it might not.100 For purposes of
this analysis, I will assume that H is a personal preference that is
independent of the other two101 but that M and SP can be positively or
negatively correlated depending on the social construction of having money
associated with the activity. I will call this factor p, which can be negative
(as in prostitution) or positive (as in professional sports).102 The p factor is
most interesting when it is negative and is intended to allow for the
possibility of a “crowding-out” phenomenon,103 which has mostly been

100. Needless to say, the independent value of each may be positive or negative. One might
be willing to pay money to engage in hedonically pleasing or social-psychologically satisfying
activities, as people do all the time for hobbies, and people often take hedonically unpleasant,
socially awkward, or even demeaning jobs in order to get the positive monetary rewards.
101. Separating out purely physical pleasure or pain from the social-psychological meaning
of the cause of the pleasure or pain is artificial in the extreme. In principle, hedonic gain can be
treated as part of SP, and indeed I ignore it as an independent factor in the analysis. I include it in
the general statement largely to separate out the social-psychological aspect, which, unlike
hedonic gains, is usually downplayed in economics.
102. Again, the culturally contingent nature of the relationship should be obvious. When the
Olympics were renewed in the modern era, they were limited to “amateurs,” because professional
sports were a form of entertainment, giving their paid performers no more respect than paid
performers were given more generally. As with all performers, this changed with the status
inversion that was part of the twentieth-century celebrity culture generated to focus mass demand
on mass-produced entertainment as opposed to the relationship/presence-based entertainment of
the past.
103. See Bruno S. Frey & Reto Jegen, Motivation Crowding Theory: A Survey of Empirical
Evidence, 15 J. ECON. SURV. 589 (2001); Bruno S. Frey & Felix Oberholzer-Gee, The Cost of
Price Incentives: An Empirical Analysis of Motivation Crowding-Out, 87 AM. ECON. REV. 746
(1997); see also FEHR & GÄCHTER, supra note 83 (analyzing the ability of incentive contracts to
undermine voluntary cooperation). For a broader moral claim about this tradeoff, see MARGARET
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2002] Coase’s Penguin

studied in the context of the relatively rare instances where altruistic

provisioning has been the major, if not exclusive, mode of provisioning of
socially important material goods among strangers, such as blood104 or
gametes.105 While analysis leaves serious questions as to whether altruistic
provisioning of these types of goods is indeed superior to market-based
provisioning as a general social policy,106 the primary disagreement
concerns which mode is more efficient in the aggregate, not whether market
provisioning displaces altruistic provisioning or whether each mode draws
different contributors.107 Using our three intuitive examples, an act of love
drastically changes meaning when one person offers the other money at its
end, and a dinner party guest who takes out a checkbook at the end of
dinner instead of bringing flowers or a bottle of wine at the beginning likely
never will be invited again. The question of money in legal writing will
depend on the social construction of the role of the author. For a practicing
advocate, p usually is positive, and higher monetary rewards represent the
respect the author receives for her craft. For a judge, p with regard to
payment for any particular piece of writing is strongly negative,
representing the prohibition on bribes. For academics, p for a particular
piece of writing may be positive or negative, depending on whether its

JANE RADIN, CONTESTED COMMODITIES (1996), and for a critique, see Kenneth J. Arrow,
Invaluable Goods, 35 J. ECON. LITERATURE 757 (1997).
104. The quintessential source of the claim that altruism is superior to markets in providing
blood is RICHARD M. TITMUSS, THE GIFT RELATIONSHIP: FROM HUMAN BLOOD TO SOCIAL
POLICY (1971).
105. See Ken R. Daniels, Semen Donors: Their Motivations and Attitudes to Their Offspring,
7 J. REPROD. INFANT PSYCHOL. 121 (1989) (finding that a majority of donors surveyed in
Australia and New Zealand gave altruistic reasons as the major motivation, with payment rated as
rather unimportant); see also Simone B. Novaes, Giving, Receiving, Repaying: Gamete Donors
and Donor Policies in Reproductive Medicine, 5 INT’L J. TECH. ASSESSMENT HEALTH CARE 639
(1989) (reviewing motivation for, and social issues of, sperm and egg donation and surrogacy);
Simone B. Novaes, Semen Banking and Artificial Insemination by Donor in France: Social and
Medical Discourse, 2 INT’L J. TECH. ASSESSMENT HEALTH CARE 219 (1986) (providing an
account of several sperm banks in France and an analysis of their varying policies on donor
compensation). But see Linda S. Fidell et al., Paternity by Proxy: Artificial Insemination with
Donor Sperm, in GENDER IN TRANSITION: A NEW FRONTIER 93, 100 (Joan Offerman-Zuckerberg
ed., 1989) (reporting that three-quarters of sperm donors in the United States were primarily
motivated by financial gain).
106. Titmuss’s thesis was challenged in a series of papers in the 1970s, see, e.g., Kenneth J.
Arrow, Gifts and Exchanges, 1 PHIL. & PUB. AFF. 343 (1972); Robert M. Solow, Blood and
Thunder, 80 YALE L.J. 1696 (1971), and more recently has been subject to refinement with the
experience of the AIDS epidemic, see Kieran Healy, The Emergence of HIV in the U.S. Blood
Supply: Organizations, Obligations, and the Management of Uncertainty, 28 THEORY & SOC’Y
529 (1999).
107. Specifically for an evaluation of Titmuss’s argument in light of the HIV crisis, see
Kieran Healy, Embedded Altruism: Blood Collection Regimes and the European Union’s Donor
Population, 105 AM. J. SOC. 1633, 1637-54 (2000) (reporting on an international comparison and
concluding that “the opportunity to sell plasma does reduce one’s likelihood of giving blood”).
More generally, for a description of empirical surveys in a number of areas, see Frey & Jegen,
supra note 103 (describing empirical research in multiple disciplines supporting the displacement
effect money has on voluntaristic motivations).
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source is considered to be an interested party paying for something that is

more akin to a brief than to an academic analysis, or, for example, a
foundation or a peer-reviewed grant, in which case “winning” the support is
considered as adding prestige.
A distinct motivational effect arises when SP is associated with
participation in collective action and concerns the presence or absence of
rewards to the other participants and the pattern of the reward function—
that is, whether some people get paid and others do not or whether people
get paid differentially for participating. This relationship could be positive
where altruism or a robust theory of desert culturally structures the social-
psychological component of the reward to support monetary appropriation
by others108 or, more commonly perhaps, negative where one agent is
jealous of the rewards of another. I will denote this factor jalt
(jealousy/altruism).
Agents will then face different courses of action that they will perceive
as having different expected rewards R:

R = Ms + H + SPp, jalt

At any given time, an agent will face a set of possible courses of action
and will have a set of beliefs about the rewards for each course of action,
each with this form. A rational agent will choose based on the value of R,
not of M. Irrespective of one’s view of whether the agent is a maximizer or
a satisficer, the agent will have some total valuation of the rewards for
adopting differing courses of action and hence of the opportunity cost of
following courses of action that exclude other courses of action.
It is quite intuitive to see then that there will be some courses of action
whose reward will be heavily based on hedonic or social-psychological
parameters, on primarily monetary rewards, or on a combination of all three
factors. At the broadest level one can simply say that agents will take
actions that have a positive value and low opportunity cost because they do
not displace more rewarding activities. Similarly, where opportunities for
action do compete with each other, an agent will pursue an activity that has
low, zero, or even negative monetary rewards when the total reward, given
the hedonic and social-psychological rewards, is higher than alternative
courses of action that do have positive monetary rewards attached to them.
Hence the phenomena of starving artists who believe they are remaining
true to their art rather than commercializing or of law professors who

108. A religiously motivated agent, for example, might consider the acquisition of monetary
returns by other agents a positive sign of success, because the appropriators are seen as deserving
in whatever theory of desert is prescribed by the religion, such as neediness or having been chosen
in some sense.
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2002] Coase’s Penguin

forego large law-firm partner draws when they choose teaching and writing
over the practice of law.
What more can we say about the likely actions of agents whose
preferences for rewards take the form I describe? First, there is a category
of courses of action that will only be followed, if at all, by people who seek
social-psychological and hedonic rewards. Assume that there are
transaction costs for defining and making M and SP available to the agent,
Cm and Csp, respectively. I assume that these costs are different, because the
former require the definition and enforcement of property rights, contracts,
and pricing mechanisms, while the latter require social mechanisms for the
association of social-psychological meaning with the act generally and with
the individual agent’s act in particular.
There is potentially a category of cases where the marginal value (V) of
an agent’s action will be less than the transaction costs of providing
monetary rewards for it, in which case the expected monetary reward will
be zero. If the social value of the contribution is greater than zero, however,
and if the hedonic and social-psychological rewards are greater than zero
and greater than the cost of making the social-psychological rewards
available, then it will be socially efficient for agents to act in this way when
opportunities to act arise. Agents will in fact do so if someone has incurred
the costs of providing the opportunities for action and the social-
psychological or hedonic rewards.
Behaviors in the following range will therefore occur only if they can
be organized in a form that does not require monetary incentives and
captures behaviors motivated by social-psychological and hedonic rewards:

Cm > V > Csp and H + SP − Csp > 0

Whether this range of activities is important depends first on the

granularity of useful actions. The more fine-grained the actions and the
more of these small-scale actions that need to be combined into a usable
product, the higher the transaction costs of monetizing them relative to the
marginal contribution of each action.109
Second, approaches that rely on social-psychological rewards will be
particularly valuable to motivate actions that are systematically undervalued
in the market, because they generate high positive externalities. A fairly
intuitive example is basic science, which is particularly ill-suited for
proprietary information production because of its high positive
externalities,110 and in which our social-cultural framework has developed

109. Technology that lowers the transaction costs could counteract this effect, decreasing the
size of the group of cases that fall into this category.
110. The public goods problem of information production limits the efficacy of proprietary
provisioning under any circumstances. The fact that basic science has many and varied uses as a
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an elaborate honor-based rewards system rather than one focused on

monetary rewards. We see similar social-psychological reward structures to
reward and motivate participation in other practices that produce high
positive externalities that would be difficult fully to compensate in
monetary terms, like teaching; military service; or uncorrupt political,
cultural, or spiritual leadership. Similarly, to the extent that peer production
can harness motivations that do not require monetization of the
contribution, the information produced using this model can be released
freely, avoiding the inefficiencies associated with the public goods problem
of information.
It is important to recognize that actions involved in creating the
opportunities for others to act are themselves acts with analogous reward
structures. The scientists who created the Mars Clickworkers project
operated on one set of monetary and social-psychological returns, while the
clickworkers themselves operated in response to a different set of hedonic
and social-psychological returns. The Open Source Development Network
funds the Slashdot platform based on one set of rewards, including an
expected monetary return, but its action generates opportunities for others
to act purely on SP- and H-type rewards. The crucial point is that the
presence of M-type rewards for the agent generating the opportunities does
not necessarily negatively affect the social-psychological returns to agents
who act on these opportunities. In other words, there is some reason why
the jalt factor for the contributors is not a strong negative value even though
monetary factors are captured by the person providing the opportunity for
collaboration.
We need, then, to state the relationship between the presence of M-type
rewards for an action and the SP-type rewards associated with it. For
simplicity, I will treat the total effect of both modifiers of SP as p, and will
separate out jalt only where there is a reason to differentiate between the
effect of monetary returns to the agent and the effects of differential reward
functions for different agents in a collaborative group—as in the case where
the person offering the opportunity to collaborate has different rewards
from the participants in the collaboration.

fundamental input into new innovation and learning creates particularly large positive externalities
and makes the public goods problem particularly salient in that context. The point was initially
made in Nelson, supra note 26, at 306 (“The problem of getting enough resources to flow into
basic research is basically the classical external-economy problem.”). The point was reiterated in
Arrow, supra note 71, at 623-25. A particularly helpful detailed discussion is Rebecca S.
Eisenberg, Intellectual Property at the Public-Private Divide: The Case of Large-Scale cDNA
Sequencing, 3 U. CHI. L. SCH. ROUNDTABLE 557 (1996). For more general statements of the
relationship between academic and commercial work, see Richard R. Nelson, What Is
“Commercial” and What Is “Public” About Technology, and What Should Be?, in TECHNOLOGY
AND THE WEALTH OF NATIONS 57, 65-70 (Nathan Rosenberg et al. eds., 1992). See also Ralph
Gomory, The Technology-Product Relationship: Early and Late Stages, in TECHNOLOGY AND
THE WEALTH OF NATIONS, supra, at 383, 388.
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2002] Coase’s Penguin

Keeping hedonic gains to one side, the reward function can be

represented as:

R = Ms + SPp

This function suggests two key implications. First, we can confidently

say that whenever M and SP are independent of each other or are positively
correlated (that is, when p ≥ 0), approaches that provide monetary rewards
for an activity will be preferred to nonmonetizable approaches toward the
exact same activity. A rational agent will prefer a project that provides both
social-psychological and monetary rewards over one that offers only one of
these rewards. Someone who loves to play basketball will, all other things
being equal, prefer to be paid for playing at Madison Square Garden over
playing at West Third and Sixth Avenue without being paid.
Second, we can say that when M and SP are negatively correlated
(p < 0), an activity will be more or less attractive to agents depending on the
values of s and p—that is, on the rate at which the value of marginal
monetary rewards for a new action is discounted by the agent and the rate at
which the presence of money in the transaction devalues the social-
psychological reward for that action. Table 3 maps the likely effects of
monetary rewards on the value of R as a function of the values of s and p.
We can say generally that individuals with a high discount rate on money
(high s) will be likely to pursue activities with a high absolute value
negative p rate only if these are organized in a nonproprietary model,
because the value of Ms for them is low, and the presence of any M-type
reward substantially lowers the value of SPp. At the simplest level, this
could describe relatively wealthy people—for example, a wealthy person is
unlikely to take a paying job serving lunch at a soup kitchen, but may
volunteer for the same job. More generally, most people who have finished
their day job and are in a part of their day that they have chosen to treat as
leisure, even though a second job is available, can be treated as having a
higher s value for that part of their day. During this portion of the day, it
will likely be easier to attract people to a project with social-psychological
benefits, and if p is large and negative, adding monetary rewards will lower,
rather than increase, participation. As we move toward a situation where the
value of s for an individual is low, and the p rate, though negative, is low,
we will tend to see a preference for combining M and SP, as one would
where p is neutral or positive.
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TABLE 3. EFFECTS OF INCREASED MONETARY REWARDS ON R

s
High Low
Substantial or
|p|, High Substantial decrease of R insignificant increase or
where decrease of R1
p<0 Insignificant increase or
Low Substantial increase of R
decrease of R
1
An increase in monetary rewards in this quadrant may be substantial or
insignificant in either increasing or decreasing R, because an increase in monetary
rewards will substantially decrease SP but will substantially increase M. If the
substantial decrease in SP and increase in M are roughly equivalent, then the
overall result will be an insignificant change of R. If the substantial decrease in SP
and increase in M are not roughly equivalent, then the overall result on R will be a
substantial change in the direction of the variable that has a larger value. For
example, if the absolute value of the decrease in SP is much greater than the
absolute value of the increase in M, then R will substantially decrease.

Finally, there may be ways in which p can be changed from negative to

positive, or its negative value can be reduced, by changing the way M is
correlated to the action. To stay with the sex example, while there is some
social discomfort associated with marriage “for money,” it does not
approach the level of social disapprobation directed at prostitution. The p
value is negative, but smaller. In other societies, perhaps in times holding
less egalitarian ideals about marriage, there might have actually been a
positive p value—as in a “good catch.” Similarly, professional performers
or athletes may have been treated with less respect than amateurs a hundred
years ago, but this has obviously changed quite dramatically. The same can
be said for the jalt factor. One can imagine that free software-development
communities would attach a negative social value to contributions of those
who demand to be paid for their contributions. The same communities may
have different feelings toward programmers who contributed for free but
who later get large consulting contracts as a result of the experience and
reputation they gained from their freely shared contributions.
This analysis suggests a series of likely conditions under which
nonproprietary organizational approaches will be sustainable. First, there is
the case of projects that are broken down into fine-grained modules, where
market remuneration would likely be too costly to sustain, but where
hedonic and social-psychological rewards can provide contributors with
positive rewards. As I will explain in the following Subsection, fine-grained
modularity is an important characteristic of the large-scale collaborations
that form the basis of peer production. The analysis of motivations suggests
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2002] Coase’s Penguin

that peer production likely will not be harnessed effectively using direct
monetary incentives. Second, there are instances where the value of
monetary return is small relative to the value of the hedonic and social-
psychological rewards, particularly where the cultural construction of the
social-psychological rewards places a high negative value on the direct
association of monetary rewards with the activities. Teenagers and young
adults with few economic commitments and a long time horizon for earning
and saving, on the one hand, and high social recognition needs, on the other
hand, are an obvious group fitting this description. Another group consists
of individuals who have earnings sufficient to serve their present and
expected tastes, but who have a strong taste for additional hedonic and
social-psychological benefits that they could not obtain by extending their
monetarily remunerated actions. Academics in general, and professional
school academics in particular, are obvious instances of this group. Many of
the volunteers for Internet-based projects who volunteer instead of
watching television or reading a book likely fall into this category.
Individuals whose present needs are met, but whose future expected needs
require increased monetary returns, might participate if the social-
psychological returns were not negatively correlated with future, indirect
appropriation, such as reputation gains. This would effectively mean that
they do add an M factor into their valuation of the rewards, but they do so
in a way that does not negatively affect the value of SP for themselves or
for other contributors to collaborative projects.

2. Diverse Motivations and Large-Scale Collaborations

The diversity of motivations allows large-scale collaborations to

convert the motivation problem into a collaboration problem. In other
words, the motivation problem is simple to resolve if the efforts of enough
people can be pooled.
In a corollary to “Linus’s Law,”111 one might say:

Given a sufficiently large number of contributions, direct monetary

incentives necessary to bring about contributions are trivial.

The “sufficiently large” aspect of this observation requires some

elaboration. “Sufficiently” refers to the fact that the number of people who
need to collaborate to render the incentives problem trivial depends on the
total cost or complexity of a project. The sustainability of any given project
depends, therefore, not on the total cost but on how many individuals

111. Coined by Eric Raymond to capture one of the attributes of the approach that developed
Linux: “Given enough eyeballs, all bugs are shallow.” RAYMOND, supra note 9, at 30.
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contribute to it relative to the overall cost. If a project that requires

thousands of person-hours can draw on the talents of fifteen- or thirty-
thousand individuals instead of a few dozen or a few hundred, then the
contribution of each, and hence the personal cost of participation that needs
to be covered by diverse motivations, is quite low. Similarly, a project that
requires ten or twenty person-hours can be provided with little heed to
incentives if it can harness the distributed efforts of dozens of participants.
More generally, one can state:

Peer production is limited not by the total cost or complexity of a

project, but by its modularity, granularity, and the cost of
integration.

Modularity is a property of a project referring to the extent to which it

can be broken down into smaller components, or modules, that can be
independently and asynchronously produced before they are assembled into
a whole. If modules are independent, individual contributors can choose
what and when to contribute independently of each other, thereby
maximizing their autonomy and flexibility to define the nature, extent, and
timing of their participation in the project. Given the centrality of self-
direction of human creative effort to the efficiencies of peer production, this
characteristic is salient.
Granularity refers to the size of the modules, in terms of the time and
effort that an agent must invest in producing them. The number of people
who will likely participate in a project is inversely related to the size of the
smallest-scale contribution necessary to produce a usable module. Usability
may place a lower boundary on granularity either for technical or economic
reasons, where at a minimum the cost of integrating a component into a
larger modular project must be lower than the value that adding that
component contributes to the project. But above that boundary, the
granularity of the modules sets the smallest possible individual investment
necessary to participate in a project. If this investment is sufficiently low,
then incentives for producing that component of a modular project can be of
trivial magnitude and many people can contribute. If the finest-grained
contributions are relatively large and would require large investment of
time and effort, the universe of potential contributors decreases. A
predominant portion of the modules in a large-scale peer production project
must therefore be relatively fine-grained for the project to be successful.
The discussion in the preceding Subsection suggests that, given the
relatively small independent value such fine-grained contributions will have
and the transaction costs associated with remunerating each contribution
monetarily, nonmonetary reward structures are likely to be more effective
to motivate large-scale peer production efforts.
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Independent of the minimum granularity of a project, heterogeneity in

the size of the modules may add to its efficiency. Heterogeneity allows
contributors with diverse levels of motivation to collaborate by contributing
modules of different sizes, whose production therefore requires different
levels of motivation. Contributors may vary widely in their hedonic taste
for creation, their social-psychological attitude toward participation, or in
opportunities for indirect monetary appropriation (like the difference
between IBM or Red Hat and individual volunteers in free software
projects). A project that allows highly motivated contributors to carry a
heavier load will be able to harness a diversely motivated human capital
force more effectively than a project that can receive only standard-sized
contributions.

B. Integration: Problem and Opportunity

The remaining obstacle to effective peer production is the problem of

integration of the modules into a finished product. Integration includes two
distinct components—first, a mechanism for providing quality control or
integrity assurance to defend the project against incompetent or malicious
contributions, and second, a mechanism for combining the contributed
modules into a whole. It is here that the term “commons” that I use in
describing the phenomenon as “commons-based peer production” gets its
bite, denoting the centrality of the absence of exclusion as the organizing
feature of this new mode of production and highlighting the potential
pitfalls of such an absence for decentralized production. Observing
commons-based peer production in the background of the commons
literature, we see integration and the commons problem it represents solved
in peer production efforts by a combination of four mechanisms: iterative
peer production of the integration function itself, technical solutions
embedded in the collaboration platform, norm-based social organization,
and limited reintroduction of hierarchy or market to provide the integration
function alone. In order for a project to be susceptible to sustainable peer
production, the integration function must be either low-cost or itself
sufficiently modular to be peer-produced in an iterative process.
Upon what kind of commons is it, then, that peer production of
information relies? Commons are most importantly defined by two
parameters.112 The first parameter is whether use of the resource is common
to everyone in the world or to a well-defined subset. The term “commons”
is better reserved for the former, while the latter is better identified as a

112. The most extensive consideration of commons and the resolution of the collective action
problems they pose is OSTROM, supra note 17.
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common property regime (CPR)113 or limited common property regime.114

The second parameter is whether or not use of the resource by those whose
use is privileged is regulated. Here one can state, following Carol Rose,115
that resources in general can be subject to regimes ranging from total (and
inefficiently delineated) exclusion—the phenomenon Michael Heller has
called the anticommons116—through efficiently delineated property and
otherwise regulated access, to completely open, unregulated access. The
infamous “tragedy of the commons” is best reserved to refer only to the
case of unregulated access commons, whether true commons or CPRs.
Regulated commons need not be tragic at all, and indeed have been
sustained and shown to be efficient in many cases.117 The main difference is
that CPRs are usually easier to monitor and regulate—using both formal
law and social norms118—than true commons; hence, the latter may slip
more often into the open access category even when they are formally
regulated.
Elinor Ostrom also identified that one or both of two economic
functions will be central to the potential failure or success of any given
commons-based production system. The first is the question of
provisioning, the second of allocation.119 This may seem trivial, but it is
important to keep the two problems separate, because if a particular
resource is self-renewing when allocated properly, then institutions
designed to assure provisioning would be irrelevant. Fishing and whaling
are examples. In some cases, provisioning may be the primary issue.

113. See id.

114. Carol M. Rose, The Several Futures of Property: Of Cyberspace and Folk Tales,
Emission Trades and Ecosystems, 83 MINN. L. REV. 129, 132 (1998).
115. Carol M. Rose, Left Brain, Right Brain and History in the New Law and Economics of
Property, 79 OR. L. REV. 479, 480 (2000).
116. Michael A. Heller, The Tragedy of the Anticommons: Property in the Transition from
Marx to Markets, 111 HARV. L. REV. 621 (1998). Although Frank Michelman originated the
concept of the anticommons, see Frank I. Michelman, Ethics, Economics, and the Law of
Property, in NOMOS XXIV: ETHICS, ECONOMICS, AND THE LAW 3, 6 (J. Roland Pennock & John
W. Chapman eds., 1982), and Robert Ellickson coined the term “anticommons,” see Ellickson,
supra note 70, at 1322 n.22, I refer to Heller, because the concept took off with Heller’s use. See
PERSPECTIVES ON PROPERTY LAW 167 (Robert C. Ellickson et al. eds., 2002) (describing the
history of the term “anticommons”).
117. For the most comprehensive survey, see OSTROM, supra note 17. Another seminal study
was JAMES M. ACHESON, THE LOBSTER GANGS OF MAINE (1988). A brief intellectual history of
the study of common resource pools and common property regimes can be found in Charlotte
Hess & Elinor Ostrom, Artifacts, Facilities, and Content: Information as a Common-Pool
Resource, Paper Presented at the Conference on the Public Domain, Duke Law School, Nov. 9-11,
2001, at http://www.law.duke.edu/pd/papers/ostromhes.pdf.
118. The particular focus on social norms rather than on formal regulation as central to the
sustainability of common resource pool management solutions that are not based on property is
Ellickson’s. See ROBERT C. ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE
DISPUTES (1991); Ellickson, supra note 70.
119. “Provisioning” refers to efforts aimed at producing a particular good that would not
otherwise exist. “Allocating” refers to decisions about how a good that exists, but is scarce
relative to demand for it, will be used most efficiently.
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2002] Coase’s Penguin

Ostrom describes various water districts that operate as common property

regimes that illustrate well the differences between situations where
allocation of a relatively stable (but scarce) water flow is the problem, on
one hand, and those where provisioning of a dam (which will result in
abundant water supply, relative to demand) is the difficult task.120
Obviously, some commons require both operations.
Information production entails only a provisioning problem. Because
information is nonrival, once it is produced no allocation problem exists.
Moreover, commons-based provisioning of information in a ubiquitously
networked environment may present a more tractable problem than
provisioning of physical matter, and shirking or free-riding may not lead
quite as directly to nonproduction. This is so for three reasons. First, the
modularity of the projects allows redundant provisioning of “dropped”
components to overcome occasional defections without threatening the
whole. Second, a ubiquitously networked environment substantially
increases the size of the pool of contributors. At first glance, this should
undermine peer production, because the likelihood of free-riding generally
increases as the size of the pool increases and the probability of social-
norms-based prevention of free-riding declines.121 But as the size of the
pool increases, the project can tolerate increasing levels of free-riding, as
long as the absolute number of contributors responding to some mix of
motivations remains sufficiently large such that the aggregation of the
efforts of those who do contribute, each at a level no higher than his or her
level of motivation dictates, will be adequate to produce the good. As long
as free-riders do not affirmatively undermine production but simply do not
contribute, the willingness of contributors to contribute should depend on
their perception of the likelihood of success given the number of
contributors, not on the total number of users. Indeed, for contributors who
seek indirect appropriation through means enhanced by widespread use of
the joint product—like reputation or service contracts—a high degree of use
of the end product, even by “free-riders” who did not contribute to
providing it, increases the expected payoff.122 Third, the public goods
nature of the product means that free-riding does not affect the capacity of
contributors to gain full use of their joint product and does not degrade their

120. OSTROM, supra note 17, at 69-88.

121. On the relationship between how small and closely knit a group is and its capacity to use
social norms to regulate behavior, see ELLICKSON, supra note 118. On the importance of social
norms in regulating behavior in cyberspace, see LAWRENCE LESSIG, CODE AND OTHER LAWS OF
CYBERSPACE (1999).
122. This attribute causes Steven Weber to describe free software production not only as
“nonrival,” but as “anti-rival”—by which he means that increasing returns to widespread use
mean that consumption by many not only does not reduce the value of a good, as in nonrival
goods, but actually enhances it. See WEBER, supra note 8, at 28-29.
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utility from it. This permits contributors who contribute in expectation of

the use value of the good to contribute without concern for free-riding.
There are, however, types of defection that are likely to undermine
provisioning by adversely affecting either (1) motivation to participate or
(2) the efficacy of participation. The first type covers actions that reduce the
value of participation, be it the intrinsic hedonic or social-psychological
components or the expected longer-term extrinsic values, that is, the
monetary rewards to reputation, human capital, etc. The second type relates
mostly to potential failures of integration, such as poor quality-control
mechanisms.

1. Threats to Motivation

There are two kinds of actions that could reduce the intrinsic benefits of
participation. First is the possibility that a behavior will affect the
contributors’ valuation of the intrinsic value of participation. Two primary
sources of negative effect seem likely. The first is a failure of integration,
so that the act of individual provisioning is seen as being wasted, rather
than adding some value to the world. This assumes that contributors have a
taste for contributing to a successful joint project. Where this is not the
case—if integration is not a component of the intrinsic value of
participation—then failure to integrate would not be significant. The World
Wide Web is an example where it is quite possible that putting up a website
on a topic one cares about is sufficiently intrinsically valuable to the author,
even without the sense of adding to the great library of the Web, that
integration is irrelevant to the considerations of many contributors.
The more important potential “defection” from commons-based peer
production is unilateral123 appropriation. Unilateral appropriation could, but
need not, take the form of commercialization of the common efforts for
private benefit. More generally, appropriation could be any act where an
individual contributor tries to make the common project reflect his or her
values too much, thereby alienating other participants from the product of
their joint effort. The common storytelling enterprise called LambdaMOO
encountered well-described crises with individuals who behaved in
antisocial ways, taking control over the production process to make the
joint product serve their own goals—like forcing female characters in the
story to “have sex” that they did not want to have.124 In LambdaMOO, the
participants set up a social structure for clearing common political will in

123. Unilateral is opposed to collective, as in the conversion of some aspect of the commons
to a common property regime where, for example, high quality or consistent contribution to the
commons could become a criterion for membership.
124. LESSIG, supra note 121, at 74-75.
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2002] Coase’s Penguin

response to this form of appropriation.125 In the examples I have described

in this Article, the explicit adherence to a norm of objectivity in
Wikipedia126 and similar references in Kuro5hin to the norm of high-quality
writing are clear examples of efforts to use social norms to regulate this
type of defection by substantive, rather than commercial, appropriation.
Similarly, some of the software-based constraints on moderation and
commenting on Slashdot and other sites serve to prevent anyone from
taking too large a role in shaping the direction of the common enterprise in
a way that would reduce the perceived benefits of participation to many
others. For example, limiting moderators to moderating no more than five
comments in any three-day period or using troll filters to prevent users from
posting too often are technical constraints that do not permit anyone to
appropriate the common enterprise called Slashdot.
Another form of appropriation that could affect valuation of
participation is simple commercialization for private gain. The primary
concern is that commercialization by some participants or even by
nonparticipants will create a sucker’s reward aspect to participation. This is
the effect I introduced into the abstract statement of diverse motivations as
the jalt factor—the effect of monetary rewards for others on the perceived
value of participation. One example of such an effect may have occurred
when the early discussion moderators on AOL boards—volunteers all—left
when they began to realize that their contributions were effectively going to
increase the value of the company. There is, however, an immensely
important counterexample—to wit, the apparent imperviousness of free
software production, our paradigm case, to this effect. Some contributors
have made billions, while some of the leaders of major projects have earned
nothing but honor.127 Query, though, whether the pattern would have held if
the primary leader of a project, such as Linus Torvalds, rather than people
less central to the Linux kernel development process, had made money
explicitly by selling the GNU/Linux operating system as a product. It is, in
any event, not implausible to imagine that individuals would be more
willing to contribute their time and effort to NASA or a nonprofit enterprise
than to a debugging site set up by Microsoft. Whether the jalt effect exists,
how strong it is, and what are the characteristics of instances when it is or is
not important is a valuable area for empirical research.
In addition to the intrinsic value of participation, an important
component of motivation also relies on the use value of the joint project and

125. See Julian Dibbell, A Rape in Cyberspace or How an Evil Clown, a Haitian Trickster
Spirit, Two Wizards, and a Cast of Dozens Turned a Database into a Society, VILLAGE VOICE,
Dec. 21, 1993, at 36, at ftp://ftp.lambda.moo.mud.org/pub/MOO/papers/VillageVoice.txt.
126. See supra text accompanying note 35.
127. In this, too, peer production is similar to academic production, where scientists see their
basic research used, very often by others, as the basis for great wealth in which they do not share.
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on indirect appropriation based on continued access to the joint product—

service contracts and human capital for instance. For such projects,
defection may again take the form of appropriation, in this case by
exclusion of contributors from the use value of the end product. (Why
academics, for example, are willing to accept the bizarre system in which
they contribute to peer review journals for free, sometimes even paying a
publication fee, and then have their institutions buy this work back from the
printers at exorbitant rates remains a mystery.) In free software, the risk of
defection through this kind of appropriation is deemed a central threat to the
viability of the enterprise, and the GNU GPL is designed precisely to
prevent one person from taking from the commons, appropriating the
software, and excluding others from it.128 This type of defection looks like
an allocation problem—one person is taking more than his or her fair share.
But again, this is true only in a metaphoric sense. The good is still
intrinsically a public good and is physically available to be used by
everyone. Law (intellectual property) may create this “allocation problem”
in a misguided attempt to solve a perceived provisioning problem, but the
real problem is the effect on motivation to provision, not an actual scarcity
that requires better allocation. The risk of this kind of unilateral
appropriation lowers the expected value contributors can capture from their
contribution, and hence lowers motivation to participate and provide the
good.

2. Provisioning Integration

Another potential problem that commons-based peer production faces

is provisioning of the integration function itself. It is important to
understand that integration requires some process for assuring the quality of
individual contributions. This could take the form of (1) hierarchically
managed review, as in the Linux kernel or Apache development processes;
(2) peer review, as in the process for moderating Slashdot comments; (3)
norms-based social organization, as in Wikipedia’s objectivity norm; or (4)
aggregation and averaging of redundant contributions, as in the Mars
Clickworkers project. Academic peer production of science is traditionally
some combination of the first three, although the Los Alamos Archive129
and the Varmus proposal for changing the model of publication in the

128. Free Software Found., supra note 19. Section 2(b) limits the license to modify software
distributed under the GPL such that the licensee “must cause any work that you distribute or
publish, that in whole or in part contains or is derived from the Program or any part thereof, to be
licensed as a whole at no charge to all third parties under the terms of this License.” Id.
129. ArXiv.org, ArXiv.org E-Print Archive, at http://www.arxiv.org (last visited Sept. 25,
2002).
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2002] Coase’s Penguin

health and biomedical sciences130 to free online publication coupled with

post-publication peer commentary as a check on quality would tend to push
the process further toward pure peer review and norms-based enforcement
of the core values of completeness and accuracy, as well as attribution and
respect for priority.
The first thing to see from the discussion of threats to motivation is that
provisioning integration by permitting the integrator to be the residual
owner (in effect, to “hire” the contributors and act as the entrepreneur)
presents substantial problems for the motivation to contribute in a peer-
based production model. Appropriation may so affect motivation to
participate that the residual owner will have to resort to market- and
hierarchy-based organization of the whole production effort. Second,
property rights in information are always in some measure inefficient.131
Creating full property rights in any single agent whose contribution is only
a fraction of the overall investment in the product is even less justifiable
than doing so for a person who pays all of the production costs. Third,
integration is quite possibly a low-cost activity, particularly with the
introduction of software-based management of the communications and to
some extent the integration of effort. To the extent that this is so, even
though integration may require some hierarchy or some market-based
provisioning, it is a function that can nonetheless be sustained on low
returns by volunteers, like those who run integration of code into the Linux
kernel or by publicly funded actors, as in the case of NASA Clickworkers.
It can also be sustained by firms, like the Open Source Development
Network that supports Slashdot, that rely on business models that do not
depend on intellectual property rights.
The cost of integration—and hence the extent to which it is a limit on
the prevalence of peer production—can be substantially reduced by
automation and the introduction of an iterative process of peer production
of integration itself. First, integration could be a relatively automated
process for some products. The use of automated collation of markings and
averaging out of deviations by NASA Clickworkers is an example, as are
many of the attributes of Slashdot or Kuro5hin. Second, the integration
function itself can be peer-produced. Again with Slashdot, the software that
provides important integration functions is itself an open source project—in
other words, peer-produced. The peer review of the peer reviewers—the
moderators—is also distributed, in that ninety percent of registered users
can review the moderators, who in turn review the contributors. As peer
production is iteratively introduced to solve a greater portion of the

130. Harold Varmus, E-BIOMED: A Proposal for Electronic Publications in the Biomedical
Sciences (1999), at http://www.nih.gov/about/director/pubmedcentral/ebiomedarch.htm.
131. See supra note 74 and accompanying text.
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integration function, the residual investment in integration that might

require some other centralized provisioning becomes a progressively
smaller investment, one that is capable of being carried on by volunteers or
by firms that need not appropriate anything approaching the full value of
the product.132
Moreover, integration could provide an opportunity for cooperative
monetary appropriation, not only, or even primarily, integration into a
general product but integration as a specific customization for specific
users.133 There are no models for such cooperative appropriation on a large
scale yet, but the idea is that many peers will be admitted to something that
is more akin to a common property regime or partnership than a commons,
probably on the basis of reputation for contributing to the commons, and
these groups would develop a system for receiving and disseminating
service/customization projects (if it is a software project) or other
information-production projects. This would not necessarily work for all
information production, but it could work in some. The idea is that the
indirect appropriation itself would be organized on a peer model so that
reputation would lead not to being hired as an employee by a hierarchical
firm, but would instead be an initiation into a cooperative, managed and
“owned” by its participants. Just as in the case of Slashdot, some
mechanism for assuring quality of work in the products would be necessary,
but it would be achievable on a distributed model, rather than a hierarchical
model, with some tracking of individual contribution to any given project
(or some other mechanism for distribution of revenues). The idea here
would be to provide a peer-based model for allowing contributors to share
the benefits of large-scale service projects, rather than relegating them to
individual indirect appropriation.
To conclude, whether or not a peer production project will be able to
resolve the integration problem is a central limiting factor on the viability of
peer production to provision any given information goods. Approaches to
integration include technology, as with the software running Slashdot or the
Clickworkers project; iterative peer production, such as the moderation and
meta-moderation on Slashdot; social norms, as with Wikipedia’s or
Kuro5hin; and market or hierarchical mechanisms that integrate the project
without appropriating the joint product, as is the case in the Linux kernel
development community.

132. Boyle focuses on this characteristic as the most interesting and potentially important
solution. See Boyle, supra note 24, at 13.
133. I owe the idea of cooperative monetary appropriation to an enormously productive
conversation with David Johnson. It was his idea that the peer production model can be combined
with the producers’ cooperative model to provide a mechanism of appropriation that would give
contributors to peer production processes a more direct mechanism for keeping body and soul
together while contributing, rather than simply waiting for reputation gains to be translated into a
contract with a company.
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CONCLUSION

In this Article, I suggest that peer production of information is a

phenomenon with much broader economic implications for information
production than thinking of free software alone would suggest. I describe
commons-based peer production enterprises occurring throughout the value
chain of information production on the Internet, from content production,
through relevance and accreditation, to distribution. I then explain that peer
production has a systematic advantage over markets and firms in matching
the best available human capital to the best available information inputs in
order to create information products.
Peer production of information is emerging because both the declining
price of physical capital involved in information production and the
declining price of communications lower the cost of peer production and
make human capital the primary economic good involved. These trends
both lower the cost of coordination and increase the importance of peer
production’s relative advantage—identifying the best available human
capital in highly refined increments and allocating it to projects. If true, this
phenomenon has a number of implications both for firms seeking to
structure a business model for the Internet and for governments seeking to
capitalize on the Internet to become more innovative and productive.
For academics, peer production provides a rich area for new research.
Peer production, like the Internet, is just emerging. While there are some
studies of peer-produced software, there is little by way of systematic
research into peer production processes more generally. There is much
room for theoretical work on why they are successful, as well as potential
pitfalls and the solutions that, in principle and in practice, can be adopted in
response to those pitfalls. The role of norms, the role of technology, and the
interaction between volunteerism and economic gain in shaping the
motivation and organization of peer production are also important areas of
research, in particular for the study of how peer groups cluster around
projects. Qualitative and quantitative studies of the importance of peer
production in the overall information economy, in particular the Internet-
based information economy, would provide a better picture of just how
central or peripheral a phenomenon this is.
For firms, the emergence of peer production may require a more
aggressive move from information product-based business models to
information-embedding material products and service-based business
models. Businesses could, following IBM or Red Hat in open source
software, focus their “production” investment on providing opportunities
for peer production, aiding in that production, and performing some of the
integration functions. Firms that adopt this model, however, will not be able
to count on appropriating the end product directly, because the threat of
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The Yale Law Journal [Vol. 112:

appropriation will largely dissipate motivations for participation. Indeed,

the capacity of a firm to commit credibly not to appropriate the joint project
will be crucial to its success in building a successful business model
involving a peer production process. This commitment would require
specific licenses that secure access to the work over time to everyone,
including contributors. It would also require a business model that depends
on indirect appropriation of the benefits of the product.134 Selling products
or services for which availability of the peer-produced product increases
demand could do this, as in the case of IBM servers that run the
GNU/Linux operating system and Apache server software. Conversely,
firms that benefit on the supply side from access to certain types of
information can capitalize on peer production processes to provide that
input cheaply and efficiently, while gaining the firm-specific human capital
to optimize their product to fit the information. Again, IBM’s investment in
engineers who participate in writing open source software releases it from
reliance on proprietary software owned by other firms, thereby creating
supply-side economies to its support of peer production of software.
Similarly, NASA’s utilization of peer production reduces its costs of
mapping Mars craters, and Google’s use of links provided by websites as
votes for relevance integrates distributed relevance judgments as input into
its own commercial product. Another option is sale of the tools of peer
production itself. For example, the popularity of software and access to
massive multiplayer online games like Ultima Online or Everquest are
instances of a growing industry in the tools for peer production of escapist
storytelling.135
For regulators, the implications are quite significant. In particular, the
current heavy focus on strengthening intellectual property rights is exactly
the wrong approach to increasing growth through innovation and
information production if having a robust peer production sector is
important to an economy’s capacity to tap its human capital efficiently.
Strong intellectual property rights, in particular rights to control creative
utilization of existing information, harm peer production by raising the cost
of access to existing information resources as input. This barrier limits the
capacity of the hundreds of thousands of potential contributors to consider
what could be done with a given input and to apply themselves to it without
violating the rights of the owner of the information input. This does not
mean that intellectual property rights are entirely bad. But we have known

134. For a general mapping of indirect appropriation mechanisms, see Benkler, supra note
76.
135. See Bob Tedeschi, E-Commerce Report: The Computer Game Industry Seeks To Bridge
an Online Gap Between Geeks and the Mainstream, N.Y. TIMES, Dec. 31, 2001, at C5. A
somewhat optimistic report estimates that this industry will pull in some $1.3 billion by 2006. See
Tamsin McMahon, Gaming Platforms Set for Explosive Growth, EUROPEMEDIA, July 3, 2002, at
http://www.europemedia.net/showness.asp?ArticleID=11326.
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2002] Coase’s Penguin

for decades that intellectual property entails systematic inefficiencies as a

solution to the problem of private provisioning of the public good called
information. The emergence of commons-based peer production adds a new
source of inefficiency.
The strength of peer production is in matching human capital to
information inputs to produce new information goods. Strong intellectual
property rights inefficiently shrink the universe of existing information
inputs that can be subjected to this process. Instead, owned inputs will be
limited to human capital with which the owner of the input has a
contractual—usually employment—relationship. Moreover, the entire
universe of peer-produced information gains no benefit from strong
intellectual property rights. Since the core of commons-based peer
production entails provisioning without direct appropriation and since
indirect appropriation—intrinsic or extrinsic—does not rely on control of
the information but on its widest possible availability, intellectual property
offers no gain, only loss, to peer production. While it is true that free
software currently uses copyright-based licensing to prevent certain kinds
of defection from peer production processes, that strategy is needed only as
a form of institutional jiujitsu to defend from intellectual property.136 A
complete absence of property in the software domain would be at least as
congenial to free software development as the condition where property
exists, but copyright permits free software projects to use licensing to
defend themselves from defection. The same protection from defection
might be provided by other means as well, such as creating simple public
mechanisms for contributing one’s work in a way that makes it
unsusceptible to downstream appropriation—a conservancy of sorts.
Regulators concerned with fostering innovation may better direct their
efforts toward providing the institutional tools that would help thousands of
people to collaborate without appropriating their joint product, making the
information they produce freely available rather than spending their efforts
to increase the scope and sophistication of the mechanisms for private
appropriation of this public good as they now do.
That we cannot fully understand a phenomenon does not mean that it
does not exist. That a seemingly growing phenomenon refuses to fit our
longstanding perceptions of how people behave and how economic growth
occurs counsels closer attention, not studied indifference and ignorance.
Commons-based peer production presents a fascinating phenomenon that
could allow us to tap substantially underutilized reserves of human creative
effort. It is of central importance that we not squelch peer production, but
that we create the institutional conditions needed for it to flourish.

136. But see McGowan, supra note 13, at 287-88 (arguing that the right to exclude will
always be necessary to prevent opportunistic appropriation of open source code).