The Fine Print in Smart Contracts

24 Pages Posted: 13 Jan 2019

See all articles by Joshua S. Gans

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: January 3, 2019

Abstract

One of the purported benefits of blockchain technologies is the ability to house what have been termed ‘smart’ contracts. Such contracts are potentially self-executing depending on the state of information recorded on a blockchain ledger. This paper examines the capabilities of smart contracts from an economic perspective. It is demonstrated that by improving observability and reducing the costs of verification of contract obligation performance, the space of feasible contracts can be enlarged. Moreover, by providing commitments to various monetary payments, a blockchain can potentially create a foundation to house certain mechanisms that have been shown to overcome difficulties of contractual incompleteness. This is demonstrated using a simple international trade environment. Thus, even though smart contracts must respect the incentives of decision-makers in their obligations, they have the potential to use easily verifiable elements to create incentives to reduce hold-up and other contractual difficulties.

Keywords: blockchain, smart contracts, contractual incompleteness, subgame perfect implementation, hold-up

JEL Classification: D86, K11

Suggested Citation

Gans, Joshua S., The Fine Print in Smart Contracts (January 3, 2019). Available at SSRN: https://ssrn.com/abstract=3309709

Joshua S. Gans (Contact Author)

University of Toronto - Rotman School of Management ( email )

Canada

HOME PAGE: http://www.joshuagans.com

NBER ( email )

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United States

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