'Smart' Contracts and External Financing

59 Pages Posted: 30 Nov 2017 Last revised: 2 Nov 2018

See all articles by Katrin Tinn

Katrin Tinn

Imperial College London - Accounting, Finance, and Macroeconomics

Multiple version iconThere are 2 versions of this paper

Date Written: October 2018

Abstract

Hash-linked timestamping is the key feature behind blockchain. It enhances trust as it enables contracting parties to have common and reliable records of transactions and of their timing. I develop a model of raising external financing where, due to this new technology, some traditional contracting frictions are not present. However, there are informational frictions whereby borrowers learn from data frequently, which affects their effort incentives. I identify conditions under which contracts benefit from being "smart", i.e., self-adjusting based on timestamps. I further show that increasing the frequency of learning makes traditional assets, e.g., debt and equity, costlier and more restrictive.

Keywords: blockchain, smart contracts, FinTech, contract design, Bayesian learning, profit-sharing, equity, debt, dynamic moral hazard

JEL Classification: D82, D86, G23, G31

Suggested Citation

Tinn, Katrin, 'Smart' Contracts and External Financing (October 2018). Available at SSRN: https://ssrn.com/abstract=3072854 or http://dx.doi.org/10.2139/ssrn.3072854

Katrin Tinn (Contact Author)

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

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