Can Blockchain Technology Help Overcome Contractual Incompleteness? Evidence from State Laws
Management Science, forthcoming
81 Pages Posted: 3 Sep 2021 Last revised: 8 Nov 2023
Date Written: June 1, 2023
Abstract
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, R&D, 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.
Keywords: Blockchain, smart contracts, incomplete contracts, hold-up, firm value, vertical integration, corporate policy
JEL Classification: L10, L14 O0, O33, O38
Suggested Citation: Suggested Citation