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For decades our common understanding of the organization of economic production has been that individuals order their productive activities in one of two ways: either as employees in firms, following the directions of managers, or as individuals in markets, following price signals. This dichotomy was first identified in the early work of Ronald Coase and was developed most explicitly in the work of institutional economist Oliver Williamson. In this paper I explain why we are beginning to see the emergence of a new, third mode of production, in the digitally networked environment, a mode I call commons-based peer production. In the past three or four years, public attention has focused on a fifteen-yearold social-economic phenomenon in the software development world. This phenomenon, called free software or open source software, involves thousands or even tens of thousands of programmers contributing to large and small scale projects, where the central organizing principle is that the software remains free of most constraints on copying and use common to proprietary materials. No one “owns” the software in the traditional sense of being able to command how it is used or developed, or to control its disposition. The result has been the emergence of a vibrant, innovative and productive collaboration, whose participants are not organized in firms and do not choose their projects in response to price signals. This paper explains that while free software is highly visible, it is in fact only one example of a much broader social-economic phenomenon. I suggest that we are seeing the broad and deep emergence of a new, third mode of production in the ∗ Professor of Law, New York University School of Law. Research for this paper was partly supported by a grant from the Filomen D’Agostino and Max Greenberg Fund at NYU School of Law. I owe thanks to many for comments on this and earlier drafts, including: Bruce Ackerman, Ed Baker, Elazar Barkan, Dan Burk, Jamie Boyle, Niva Elkin Koren, Terry Fisher, Natalie Jeremijenko, Dan Kahan, Doug Lichtman, Tara Lemmy, Mark Nadel, Carol Rose, Bob Ellickson, Peggy Radin, Clay Shirky, Helen Nissenbaum, Jerry Mashaw, Eben Moglen, Larry Lessig, Chuck Sabel, Alan Schwartz, Richard Stallman, and Kenji Yoshino. I owe special thanks to Steve Snyder for his invaluable research assistance on the peer production enterprises described here. I have gotten many question about the “Coase’s Penguin” portion of the title. It turns out that the geek culture that easily recognizes “Coase” doesn’t’ recognize the “penguin,” and vice versa. So, “Coase” refers to Ronald Coase, who originated the transactions costs theory of the firm that provides the methodological template for the positive analysis of peer production that I offer here. The penguin refers to the fact that the Linux kernel development community has adopted the image of a paunchy penguin as its mascot/trademark. One result of this cross-cultural conversation is that I will occasionally explain in some detail concepts that are well known in one community but not in the other. 2 COASE’S PENGUIN V.04.3 AUGUST. 2002 2 digitally networked environment. I call this mode “commons-based peer production,” to distinguish it from the propertyand contract-based modes of firms and markets. Its central characteristic is that groups of individuals successfully collaborate on largescale projects following a diverse cluster of motivational drives and social signals, rather than either market prices or managerial commands. I explain why this mode has systematic advantages over markets and managerial hierarchies when the object of production is information or culture, and where the physical capital necessary for that production—computers and communications capabilities—is widely distributed instead of concentrated. In particular, this mode of production is better than firms and markets for two reasons. First, it is better at identifying and assigning human capital to information and cultural production processes. In this regard, peer production has an advantage in what I call “information opportunity cost.” That is, it loses less information about who the best person for a given job might be than either of the other two organizational modes. Second, there are substantial increasing returns, in terms of allocation efficiency, to allowing larger clusters of potential contributors to interact with large clusters of information resources in search of new projects and opportunities for collaboration. Removing property and contract as the organizing principles of collaboration substantially reduces transaction costs involved in allowing these large clusters of potential contributors to review and select which resources to work on, for which projects, and with which collaborators. This results in the potential for substantial allocation gains. The article concludes with an overview of how these models use a variety of technological and social strategies to overcome the collective action problems usually solved in managerial and market-based systems by property, contract, and managerial commands.