The Blockchain, Plums, and Lemons - Information Asymmetries & Transparency in Decentralized Markets

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)

7th Karlsruhe Service Summit (KSS) - Services in the Digital Era, September 18, 2018, Karlsruhe

76 Pages Posted: 31 Jul 2018 Last revised: 3 Nov 2018

See all articles by Benedikt Notheisen

Benedikt Notheisen

Karlsruhe Institute of Technology

Christof Weinhardt

Karlsruhe Institute of Technology

Date Written: October 17, 2018

Abstract

Despite a growing interest, researchers and practitioners still struggle to transfer the blockchain concept introduced by Bitcoin to market-oriented application scenarios. To shed light on the technology's usage in markets with asymmetric information, this study analyzes the effect of the blockchain's public transparency paradigm on behavioral patterns and market outcomes. In line with prior research, our findings indicate that the blockchain's shared record mitigates adverse selection effects and reduces moral hazard of good market participants (plums). In addition, we identify an incentive for bad market participants (lemons) to behave opportunistically in the presence of perfect quality information. More specifically, the disclosed information allows them to learn about quality differences between plums and lemons, deceive their counterparties, and move to a new equilibrium with increased utility. As a result, the market collapses despite a welfare gain and future generations are denied market access. In addition, plums and lemons are committed to inefficient equilibria following irrational behavior. In total, this study aims to provide initial guidance for blockchain adoption in the context of markets with information asymmetries and highlights risks that arise from competition, the exposure to irrational behavior, and the implementation of services on the infrastructure level.

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

JEL Classification: D53, D82, G21, L86

Suggested Citation

Notheisen, Benedikt and Weinhardt, Christof, The Blockchain, Plums, and Lemons - Information Asymmetries & Transparency in Decentralized Markets (October 17, 2018). FinteQC 2018 - The first annual conference on Fintech and Banking Transformation, June 20-21, 2018, Lévis (Québec) ; 7th Karlsruhe Service Summit (KSS) - Services in the Digital Era, September 18, 2018, Karlsruhe. 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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