Efficient Contracts for Digital Content

Abstract

This paper analyses efficient contracts for digital content, focusing on the music industry. It contributes to the quest for an efficient intellectual property rights environment for information goods. Moreover, it adds an interesting application to the field of behavioural economics. The model is set in a contract theory framework with the copyright holder being the principal and a consumer the agent. We offer three contract cases for analysis: strong copy protection, a strategically low price and voluntary reciprocal contributions. Insights from the economics of information and behavioural economics - information goods have public goods properties; social preferences are significant among individuals - are applied to examine the value of a strict copyright enforcement in the digital age. We find that endogenous incomplete contracts based on fair, reciprocal behaviour may achieve a first-best allocation of information goods, while complete contracts are limited to second-best results.