Blockchain and the Value of Operational Transparency for Supply Chain Finance

Mack Institute for Innovation Management, Working Paper Series

56 Pages Posted: 6 Dec 2017 Last revised: 25 Nov 2018

See all articles by Jiri Chod

Jiri Chod

Boston College

Nikolaos Trichakis

Massachusetts Institute of Technology (MIT)

Gerry Tsoukalas

University of Pennsylvania - The Wharton School

Henry Aspegren

Massachusetts Institute of Technology (MIT)

Mark Weber

Massachusetts Institute of Technology (MIT)

Date Written: September 15, 2018

Abstract

In this paper, we develop a new theory that shows signaling a firm's fundamental quality (e.g., its operational capabilities) to lenders through inventory transactions to be more efficient --- it leads to less costly operational distortions --- than signaling through loan requests, and we characterize how the efficiency gains depend on firm operational characteristics such as operating costs, market size, inventory salvage value and failure probability.

Signaling through inventory being only tenable when inventory transactions are verifiable at low enough cost, we then turn our attention to how this verifiability can be achieved in practice and argue that blockchain technology has the potential to enable it more efficiently than traditional monitoring mechanisms. To exemplify, we introduce b_verify, an open-source software/hardware blockchain system we developed to demonstrate how this technology can be implemented in agricultural supply chains, in a cost effective way.

Our paper identifies an important benefit of blockchain adoption --- by opening a window of transparency into a firm's operations, blockchain technology furnishes the ability to secure favorable financing terms at lower signaling costs. Furthermore, our analysis of the preferred signaling mode sheds light on what types of firms or supply chains would stand to benefit the most from this use of blockchains.

Keywords: Blockchain, Entrepreneurship

Suggested Citation

Chod, Jiri and Trichakis, Nikolaos and Tsoukalas, Gerry and Aspegren, Henry and Weber, Mark, Blockchain and the Value of Operational Transparency for Supply Chain Finance (September 15, 2018). Mack Institute for Innovation Management, Working Paper Series. Available at SSRN: https://ssrn.com/abstract=3078945 or http://dx.doi.org/10.2139/ssrn.3078945

Jiri Chod

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Nikolaos Trichakis

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Gerry Tsoukalas (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Henry Aspegren

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Mark Weber

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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