Can Blockchain Technology Help Overcome Contractual Incompleteness? Evidence from State Laws

Real-world contractual agreements between firms are often incomplete, leading to suboptimal investment and loss of value in supply chain relationships. To what extent can blockchain technology help alleviate problems arising from contractual incompleteness? We examine this issue by exploiting a quas...

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Bibliographic Details
Published in:Management science 2023-11, Vol.69 (11), p.6540-6567
Main Authors: Chen, Mark A., Hu, Shuting Sophia, Wang, Joanna, Wu, Qinxi
Format: Article
Language:English
Subjects:
Blockchain
Contracts
corporate policy
Digital currencies
Finance
holdup problem
incomplete contracts
Investors
Management science
Moral hazard
Regulation
Revenue
Revenue sharing
smart contracts
Ventures
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Summary:Real-world contractual agreements between firms are often incomplete, leading to suboptimal investment and loss of value in supply chain relationships. To what extent can blockchain technology help alleviate problems arising from contractual incompleteness? We examine this issue by exploiting a quasi-natural experiment based on the staggered adoption of U.S. state laws that increased firms’ in-state ability to develop, adopt, and use blockchain technology. We find that, after exposure to a pro-blockchain law, firms with greater asset specificity exhibit more positive changes to Tobin’s Q , research and development, and blockchain-related innovation. Also, such firms appear to rely less on vertical integration, form more strategic alliances, and shift their emphasis to less geographically proximate customers. Overall, our results suggest that blockchain technology can help firms remedy constraints and inefficiencies arising from contractual incompleteness. This paper was accepted by Will Cong, Special Section of Management Science : Blockchains and Crypto Economics. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.04139 .
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2022.04139