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Extending Amartya Sen’s Paretian Liberal Paradox to a Firm’s Hierarchy

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Listed:
  • Massimiliano Vatiero

Abstract

Smart contracts (i.e., agreements enforced by a blockchain) are supposed to work at lower transaction costs than traditional (and incomplete) contracts that instead exploit a costly legal enforcement. This paper challenges that claim. I argue that because of the need for adaptation to mutable and unpredictable occurrences (a chief challenge of transaction cost economics à la Oliver Williamson), smart contracts may incur higher transaction costs than traditional contracts. This paper focuses on two problems related to the adaptation: first, smart contracts are constructed to limit and potentially avoid any ex-post legal intervention, including efficiency-enhancing adaptation by courts. Second, the consensus mechanism on which every smart contract depends may lead to additional transaction costs due to a majority-driven adaptation of the blockchain that follows Mancur Olson’s Logic of groups. The paper further proposes several institutional expedients that may reduce these transaction costs of smart contracts.

Suggested Citation

  • Massimiliano Vatiero, 2023. "Extending Amartya Sen’s Paretian Liberal Paradox to a Firm’s Hierarchy," DEM Working Papers 2023/3, Department of Economics and Management.
    • Handle: RePEc:trn:utwprg:2023/3
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    References listed on IDEAS

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    1. Hillinger, Claude & Lapham, Victoria, 1971. "The Impossibility of a Paretian Liberal: Comment by Two Who are Unreconstructed," Journal of Political Economy, University of Chicago Press, vol. 79(6), pages 1403-1405, Nov.-Dec..
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    Keywords

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    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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