The actions of collectives who primarily meet on-line have recently captured the attention of the media, general public, business executives, and academics. File-sharing, open-source, and computer viruses are all carried out by loosely bounded collectives, rather than by firms or other formal organizations. These collectives operate in concert to accomplish innovation goals that may have great economic significance. Despite their importance, empirical work is scarce, and theoretical work has taken either the self-interest or the communal view to explain contributions. We point out the logical deficiencies and continue empirically through original data on a collective devoted to the sharing of digital music, which does not fit neatly in either explanation. To account for the survival and effectiveness of these collectives, we offer a four legged framework that draws on research in economic sociology and behavioral economics. We argue that the survival of cooperation despite known free riding has to do with the nature of the exchanged good--economic goods that are non-rival are more likely to be exchanged in an open system, and the (non) identifiability of (defectors) beneficiaries encourages cooperative behavior and discourages costly punishments. Further, we argue that the efficiency in production is achieved through the mode of exchange--generalized exchange is more conducive to innovative work than direct exchange, and by institutional mechanisms allow these collectives to enjoy some of the benefits of formal organizations, while preserving their unique advantages. The suggested framework fits more phenomenon than previous explanations and can easily produce refutable propositions.
