Nonlinear Income Inequality Effect on Software Piracy

We examine the relationship between income inequality and software piracy rates in the presence of network effects. By the constructions of a theoretical framework, we are able to explain the relationship between income distributions and software piracy rates. Our research suggests that the proportion of the population having the positive net benefit of using pirated software increases with income inequality at a diminishing rate, and then eventually decreases. We provide empirical evidence for this inverted U-shaped relationship between income inequality and software piracy rates, while controlling for country-level income, judicial efficiency, individualism and the proportion of fixed broadband subscribers. Our theoretical and empirical results imply that lax anti-piracy policies would make software producers better off (i.e.,higher software sales because of network effects) in countries whose income inequality is moderate, but worse off in countries whose income inequality is severe. Therefore, the anti-piracy government’s policy and software company’s strategy should be deliberately designed considering the non-linear effects of income inequality.