Firms as Incubators of Open-Source Software

Many successful open source projects have been developed by programmers who were employed by firms but worked on the open source projects on the side due to economic incentives like career improvement benefits. Such side work may be a good thing for the employing firms too if they get some strategic value from the open source software and/ or if the productivity of the programmers on these projects improves due to learning by doing effects. However, the programmers may work more or less on these projects than what is best for the firms. To manage the programmers’ effort the firms set appropriate employment policies and incentives. These policies and career concerns then together govern the programmers’ effort allocation between the open source and proprietary projects. We examine this relationship using a variant of the principal agent model. We derive and characterize the optimal employment contracts and show that firms either offer a bonus for only one of the two projects or do not offer any bonuses. But if attractive alternate employment opportunities are available, they change their strategy and may offer bonuses for both projects simultaneously.