'Smart' Contracts and External Financing
59 Pages Posted: 30 Nov 2017 Last revised: 2 Nov 2018
Date Written: October 2018
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: Suggested Citation