In open source software development, unlike the private investment model, open source innovators freely share the source code to use and modify it. Although the source code of open-source software is freely available, open-source softwares are subject to very precise licensing agreements. Among the most common licenses are the General Public License (GPL) and the European Union Public License (EUPL). In this project, we will study the economics of innovation through open source development. We will provide a concrete theoretical framework to analyze the dynamics of open source innovation directly incorporating the properties of the licensing agreements it is subject to. We will answer the following set of questions: (1) When there is an open source available, how do the innovators act? Do they tend to use the open source under the given license, or choose to stay out of the open source community? Are there any social welfare gains of having an open source relative to private investment model? (2) How does the competition between an open source production, say Linux operating system and a private investment production, say Microsoft, work? What are the effects of such a competition on the open source production and on the social welfare? Can open source production overthrow the proprietary production? Should the open source production be subsidized?There are three important reasons to carry out the proposed project. First, the open source production is clearly a rapidly growing phenomenon. Second, because of its public good nature, open source production has a close connection to the theory of private provision of public good, hence to the famous free-riding problem in economics. Finally, the European Union highly values open source software and its applications. The European Commission published a number of strategies regarding the open source softwares during the period 2000-2010, and formally approved the EUPL by 2009, which is considered a major achievement.