A general equilibrium analysis of software development: Implications of copyright protection and contract enforcement

We develop a general equilibrium model to study the implications of a legal environment on the organization of software production. We show that contract enforcement determines the organizational mode (i.e., in-house versus outsourcing) of customized software development while copyright protection affects both packaged software as well as customized software development. We obtain some testable results: when copyright protection is weak, only customized software will be developed; when copyright protection is strong, both customized software and packaged software will be developed; environment changes in one software market affect the equilibrium in the other software market.