Innovation Through Optimal Licensing in Free Markets and Free Software

developers. We also find conditions when firms choose proprietary licenses despite innovation and network eects. In social planning terms, we find that optimal protection for reusable information is not arbitrarily long. Overlong protection interferes with the inputs to downstream innovation. Further, licenses must enforce shorter-than-privately-optimal disclosure terms. Otherwise, a prisoner’s dilemma in private incentives limits free access to derivative work, essential for decentralized innovation. In modeling terms, we add to the recent literature on two-sided network eects by incorporating a production function on one side of the market. We also contribute a framing innovation that places several existing license types in a space suggesting that socially optimal but unexplored licenses might exist.

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