Working Paper: NBER ID: w25443
Authors: Joshua S. Gans
Abstract: One of the purported benefits of blockchain technologies is the ability to house what have been termed ‘smart’ contracts. Such contracts are potentially self-executing depending on the state of information recorded on a blockchain ledger. This paper examines the capabilities of smart contracts from an economic perspective. It is demonstrated that by improving observability and reducing the costs of verification of contract obligation performance, the space of feasible contracts can be enlarged. Moreover, by providing commitments to various monetary payments, a blockchain can potentially create a foundation to house certain mechanisms that have been shown to overcome difficulties of contractual incompleteness. This is demonstrated using a simple international trade environment. Thus, even though smart contracts must respect the incentives of decision-makers in their obligations, they have the potential to use easily verifiable elements to create incentives to reduce hold-up and other contractual difficulties.
Keywords: Blockchain; Smart Contracts; Contract Theory; Economic Mechanisms
JEL Codes: D86; K12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| blockchain technology (E42) | observability (D80) |
| observability (D80) | reduction of monitoring costs (G14) |
| smart contracts (D86) | automated execution (C69) |
| verification processes (C12) | smart contract effectiveness (D86) |
| smart contracts (D86) | human elements for accurate information injection (C90) |
| performance verification (C52) | effectiveness of smart contracts (D86) |