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CEP discussion paper
Digital Goods and the New Economy
Danny Quah
March 2003
Paper No' CEPDP0563:
Full Paper (pdf)

JEL Classification: D60;L12;O30;R12

Tags: aspatial; emergence; idea; information; innovation; intellectual asset; internet; knowledge; open source; weightless economy

Digital goods are bitstrings, sequences of 0s and 1s, which have economic value. They are distinguished from other goods by five characteristics: digital goods are nonrival, infinitely expansible, discrete, aspatial, and recombinant. The New Economy is one where the economics of digital goods importantly influence aggregate economic performance. This Article considers such influences not by hypothesizing ad hoc inefficiencies that the New Economy can purport to resolve, but instead by beginning from an Arrow-Debreu perspective and asking how digital goods affect outcomes. This approach sheds light on why property rights on digital goods differ from property rights in general, guaranteeing neither appropriate incentives nor social efficiency; provides further insight into why Open Source Software is a successful model of innovation and development in digital goods industries; and helps explain how geographical clustering matters.