Contracts and Motivations. The Case of Open Source

The literature on Open Source phenomenon has revealed the crucial role played by both intrinsic and extrinsic motivations. However an analysis attempting to formally explore this interplay is still missing. In this paper, we try to fill the gap by introducing intrinsic motivations in standard principal-agent model, focusing on the case of Open Source Software (OSS). We show that, if developers’ intrinsic motivation is sufficiently high, paying developers to work on OSS projects allows the firm to induce a desired level of workers’ effort at a lower cost compared to the standard case of monetary incentives and sanctions coupled with costly monitoring.