1 Networks of Tinkerers: a Model of Open-Source Innovation Peter B. Meyer BLS brown bag seminar, March 15, 2006

2 Introduction Hobbyists have developed important technology.  open source software Linux; processing; Web servers/browsers  personal computers Homebrew Club of hobbyists, circa 1975  airplanes – a clearly documented case Goal here: try some assumptions about the hobbyists / tinkerers show they would share information in networks explore assumptions a bit

3 Aircraft developments From the 1870s to the 1900s there is a lot of “open-source” innovation in aircraft  1800 – George Cayley and many others try aeronautical experiments  starting 1870s, several aeronautical journals  1893 Octave Chanute’s Progress in Flying Machines  1903 – Wrights fly

4 Assumptions for micro model Assume there are motivated tinkerers  We do observe this Assume they have a way to make “progress”  defining progress carefully Assume total technological uncertainty  No market is identifiable  so no R&D / competition  The tinkerers would share information

5 The Tinkerer Tinkerer has activity/hobby A. (for “aircraft” or “activity”) Tinkerer receives positive utility from A of a t per period. a 0 is known later choices and rules determine a t β is a discount factor between zero and one (assume.95) applied to future period utility. Net present expected utility:

6 Tinkering rules Tinkerer may invest in ("tinker with") A The agent thinks that tinkering this period will raise all future period payoffs a t by p units each time period.  p stands for a rate of progress, which is subjectively experienced by the agent  We assume p is fixed and known to the agent  Example:.07

7 Tinkering decision Tinkerer compares those gross benefits to the cost which is 1 utility unit Tinkerer weights estimated costs and benefits Benefits from one effort to tinker equal p in each subsequent period. The present value of those payoffs is:

8 Rates of Progress Progress must meet the criterion above for tinkering to be worth it Progress is subjective There are not many tinkerers working on this activity who can make this much progress. More issues later.

9 Payoffs from endless tinkering Payoffs period 0period 1period 2period 3period 4… pppp(pβ/[1-β] ) pppβ() ppβ β () pβ β β()... a 0 -1a0-1+pa0-1+2pa0-1+3pa0-1+4pa0-1+tp Present value of all that at time zero has a closed form:

10 A network of two tinkerers Case of two tinkerers with identical utility functions  p 1 and p 2 – subjective rate of progress  Their innovations are useful to one another Tinkerers form a network Present value of expected utility:

11 Subgroups of occasional tinkerers A group of slow-progress tinkerers might agree to work together to generate progress rate p. Then the group acts like a single “tinkerer” in terms of its output and also in its incentive to join other groups There are something like economies of scale here; it’s a positive sum game. So Wilbur and Orville Wright could be one tinkerer maybe also:  Boston-area group  All readers of a certain journal  Kite people, together, as distinguished from balloon people

12 “Progress” is subjective

13 Standardization and Specialization Only the fraction f (between 0 and 1) of experiments by player two are usable to player one Suppose for a cost c s player one can adjust his project to look more like the other tinkerer’s project And, that this would raise the usable findings to f 2 That’s standardization Present value of utility from standardizing is:

14 Standardization and Specialization Key comparison is above Player one benefits more from standardizing if, ceteris paribus:  the other tinkerers are producing a large flow of innovations p2;  the cost of standardizing c s is small;  the gain in useful innovations from the others (f2-f) is large. Same logic supports specialization These are technology phenomena, not requiring market processes

15 Searching and Joining Suppose there is a cost to joining the network  costs of subscribing, paying attention  it’s worth the cost to a tinkerer if the cost (c j ) is low he values future outcomes a lot the others are producing a lot of progress (p) their progress is useful to him – f is high enough Suppose there is also a cost to searching for new members  Chanute wrote book  others published journals  Then the search costs affect innovative output (Web has effect)  There is a role for a special effort to expand the network  Paper does not model this

16 Entrepreneurial Exits At a few points there was tension:  Ader “drops out” in 1891  Langley keeps secret wing design after (Chanute shares it anyway.)  Wrights stop sharing as much in late 1902 After some perceived of breakthrough Jobs and Wozniak start Apple  they hire Homebrew club people as employees Red Hat becomes a company

17 Example exit: Clement Ader’s Eole It traveled 50 meters in uncontrolled flight in 1891 French military thought it would be useful. Ader didn’t patent outside France because it would expose details. Chanute criticized this choice. Ader “drops out” from prior communication links.

18 Entrepreneurial exits from network If a tinkerer has an insight into how to make a profitable product it may be worth leaving the network conducts directed R&D becomes an entrepreneur enters economic statistics

19 Conclusion This process may be important  explaining the rise of industrial countries a long time ago  with open source software, now I do not know of other models of it Key assumptions:  technological uncertainty (no clear product and market)  motivated tinkerers  some way to make progress  some way to network Search and matching costs take some more thinking An industry can spring out of this, not well modeled yet