When Do Smart Contracts and IoT Improve Efficiency? Automated Execution vs. Increased Information
19 Pages Posted: 30 May 2019
Date Written: May 26, 2019
The increased attention to blockchain-related technologies has brought in focus "smart" contacts, whose key feature is the automated algorithmic execution based on a mapping of certain detectable states of nature to corresponding contractual actions. In this paper we develop a model of smart contracts in the context of a car financed by a bank, a setting often used to illustrate the application of smart contracts. We analyze four possible regimes: (a)"conventional" contracting; (b) contracting with information from IoT sensors; (c) "smart" contracts that automate certain actions; and (d) the combination of "smart" contracts and IoT sensors. Connected sensors can disable the car (thus depriving the buyer of its corresponding utility) and reduce the seller's cost to repossess (e.g., by revealing its physical location); we find that their impact on trading outcomes and efficiency depends on the structure and parameter values of the setting. Smart contracts allow the parties to commit not to hold up each other; we find that when smart contracts affect the outcome, they typically increase the trading region and efficiency, but for certain parameter values they surprisingly can have the opposite effect. Our analysis shows that connected sensors and smart contracts can have different impacts on contracting outcomes and efficiency, and thus these two mechanisms should not be confounded.
Keywords: smart contracts, connected sensors, IoT, blockchain
JEL Classification: D86, L14, L24
Suggested Citation: Suggested Citation