The Blockchain, Plums, and Lemons

Herrenhausen Conference: Transparency and Society – Between Promise and Peril, June 12 - 14, 2018, Berlin

FinteQC 2018 - The first annual conference on Fintech and Banking Transformation, June 20 - 21, 2018, Lévis (Québec)

2 Pages Posted: 31 Jul 2018  

Benedikt Notheisen

Karlsruhe Institute of Technology

Christof Weinhardt

Karlsruhe Institute of Technology

Date Written: June 26, 2018

Abstract

Despite financial markets' growing interest, researchers and practitioners still struggle to transfer the blockchain concept introduced by Bitcoin to other application scenarios. To shed light on the technology's usage in markets with asymmetric information, this study analyzes its effect as an information sharing arrangement in credit markets. In line with prior research, our findings indicate that sharing information about past entrepreneurial performance mitigates the impact of adverse selection effects on the banking side and reduces moral hazard of good entrepreneurs (plums) by generating a disciplinary effect. In addition, we identify an incentive for bad entrepreneurs (lemons) to behave opportunistically in order to be mistaken for plums when switching between banks. More specifically, the blockchain's public record supplies them with information about the quality difference between plums and lemons, and thus allows them to optimize their mimicking. Whether this additional information leads to an increase or decrease of moral hazard in total and under which circumstances the resulting behavior induces negative net utility and welfare effects depends on the characteristics of the market environment (e.g. quality differences, cost of capital, etc.). In total, this study aims to provide an initial guidance for the application of blockchain technology in markets with asymmetric information, offers a first analytic assessment of the underlying economic mechanisms on the level of individual stakeholders, and indicates that greater transparency must not always be better.

Keywords: Information Sharing, Blockchain, Market for Lemons, Credit Markets, Moral Hazard

JEL Classification: D53, D82, G21, L86

Suggested Citation

Notheisen, Benedikt and Weinhardt, Christof, The Blockchain, Plums, and Lemons (June 26, 2018). FinteQC 2018 - The first annual conference on Fintech and Banking Transformation, June 20 - 21, 2018, Lévis (Québec) . Available at SSRN: https://ssrn.com/abstract=3202667 or http://dx.doi.org/10.2139/ssrn.3202667

Benedikt Notheisen (Contact Author)

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

Christof Weinhardt

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

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