Comparing economic incentives in peer-to-peer networks

Users who join a peer-to-peer network have, in general, suboptimal incentives to contribute to the network, because of the externalities that exist between them. The result is an inefficient network where the overall levels of contribution are less than would be the case if each peer acted in the interests of the entire network of peers. Incentives provided in the form of prices or contribution rules that require no money transfers can play an important role in reducing these inefficiency effects. The problem in designing such incentive schemes is information: Designing an optimal incentive scheme requires complete knowledge of the types and preferences of the individual peers and their identities. In this paper we discuss the above issues in terms of a simple but representative example by introducing the basic economic concepts and models. We then investigate the practical issue of designing several simpler incentive schemes requiring less information and compare their efficiency loss to the optimal. We show using numerical analysis that these schemes converge to a fixed proportion of the full information optimal as the number of peers in the network becomes large. This result means that it is not necessary to collect large amounts of information, or to undertake complicated calculations, in order to implement the correct incentives in a large peer-to-peer network. 2004 Elsevier B.V. All rights reserved.