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The Fine Print in Smart Contracts

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  • Joshua S. Gans

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.

Suggested Citation

  • Joshua S. Gans, 2019. "The Fine Print in Smart Contracts," NBER Working Papers 25443, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25443
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    File URL: http://www.nber.org/papers/w25443.pdf
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    References listed on IDEAS

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    1. Eric Maskin & Jean Tirole, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 83-114.
    2. Benito Arruñada & Luis Garicano, 2018. "Blockchain: The birth of decentralized governance," Economics Working Papers 1608, Department of Economics and Business, Universitat Pompeu Fabra.
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    Cited by:

    1. Benito Arruñada, 2020. "Prospects of blockchain in contract and property," Economics Working Papers 1696, Department of Economics and Business, Universitat Pompeu Fabra.

    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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