Understanding smart contracts as a new option in transaction cost economics

Among different concepts associated with the term blockchain, smart contracts have been a prominent one, especially popularized by the Ethereum platform. In this study, we unpack this concept within the framework of Transaction Cost Economics (TCE). This institutional economics theory emphasizes the role of distinctive (private and public) contract law regimes in shaping firm boundaries. We propose that widespread adoption of the smart contract concept creates a new option in public contracting, which may give rise to a smart-contract-augmented contract law regime. We discuss tradeoffs involved in the attractiveness of the smart contract concept for firms and the resulting potential for change in firm boundaries. Based on our new conceptualization, we discuss potential roles the three branches of government – judicial, executive, and legislative – in enabling and using this new contract law regime. We conclude the paper by pointing out limitations of the TCE perspective and suggesting future research directions

Why Didn’t Subprime Investors Demand a (Much Larger) Lemons Premium?

The subprime crisis would never have occurred had investors not been such enthusiastic consumers of subprime securities. The investors now say, somewhat self-servingly (but probably correctly), that they did not understand the securities -- securities for which they were willing to pay very high prices. Investors\u27 willingness to purchase these securities on terms that were favorable to the sellers, and unfavorable to them, presents a considerable puzzle. Investors do not want to miss out on the next big thing

Trust conceptualized as a corporate knowledge asset

To most individuals, "trust" can be viewed as a knowledge corporate asset that may add, or rest, value to the company. The role of knowledge in achieving a competitive advantage is becoming and increasingly important management issue in all business and non-business sectors. As such, our Throughput Modeling approach indicates how six different trust behaviors can be guided, how trust decision making can be improved and made defensible, and how special problems facing individuals can be dealt with via decision-making pathways leading to an action

Firms, Courts, and Reputation Mechanisms: Towards a Positive Theory of Private Ordering

This Essay formulates a positive model that predicts when commercial parties will employ private ordering to enforce their agreements. The typical enforcement mechanism associated with private ordering is the reputation mechanism, in which a merchant community punishes parties in breach of contract by denying them future business. The growing private ordering literature argues that these private enforcement mechanisms can be superior to the traditional, less efficient enforcement measures provided by public courts. However, previous comparisons between public and private contractual enforcement have presented a misleading dichotomy by failing to consider a third enforcement mechanim: the vertically integrated firm. This Essay develops a model that comprehensively addresses three distinct types of enforcement mechanisms--firms, courts, and reputation-based private ordering. The model rests on a synthesis of transaction cost economics, which compares the efficiencies of firms versus markets, and the private ordering literature, which compares the efficiencies of public courts versus private ordering. It hypothesizes that private ordering will arise when agreements present enforcement difficulties, high-powered market incentives are important, and the costs of entry barriers are low. The Essay then conducts an illustrative test by comparing the model\u27s predictions to documented instances of private ordering

Promoting Honesty in Negotiation: An Exercise in Practical Ethics

In a competitive and morally imperfect world, business people are often faced with serious ethical challenges. Harboring suspicions about the ethics of others, many feel justified in engaging in less-than-ideal conduct to protect their own interests. The most sophisticated moral arguments are unlikely to counteract this behavior. We believe that this morally defensive behavior is responsible, in large part, for much undesirable deception in negotiation. Drawing on recent work in the literature of negotiations, we present some practical guidance on how negotiators might build trust, establish common interests, and secure credibility for their statements thereby promoting honesty We also point out the types of social and institutional arrangements, many of which have become commonplace, that work to promote credibility, trust, and honesty in business dealings. Our approach is offered not only as a specific response to the problem of deception in negotiation, but as one model of how research in business ethics might offer constructive advice to practitioners.Credibility; Business Ethics; Negotiations; Institutions

Ignore These At Your Peril: Ten principles for trust design

Online trust has been discussed for more than 10 years, yet little practical guidance has emerged that has proven to be applicable across contexts or useful in the long run. 'Trustworthy UI design guidelines' created in the late 90ies to address the then big question of online trust: how to get shoppers online, are now happily employed by people preparing phishing scams. In this paper we summarize, in practical terms, a conceptual framework for online trust we've established in 2005. Because of its abstract nature it is still useful as a lens through which to view the current big questions of the online trust debate - large focused on usable security and phishing attacks. We then deduct practical 10 rules for providing effective trust support to help practitioners and researchers of usable security

Community Enforcement of Informal Contracts: Jewish Diamond Merchants in New York

The diamond industry is home to many unusual features: the predominance of an ethnically homogeneous community of merchants, the norm of intergenerational family businesses, and a rejection of public courts in favor of private contract enforcement. This paper explains that the diamond industry\u27s unique attributes arise specifically to meet the particularly rigorous hazards of transacting in diamonds. Since diamonds are portable, easily concealable, and extremely valuable, the risk associated with a credit sale can be especially costly. However, the industry enjoys valuable organizational efficiencies if transactions occur on credit between independent, fully incentivized agents. Thus, an efficient system of exchange will find ways to induce merchants who purchase on credit to fulfill their payment obligations. The very features that give the diamond industry an unusual profile are responsible for providing institutions to support credit sales. A system of private arbitration spreads information regarding merchants\u27 past dealings, so a reputation mechanism to monitor merchants can take hold. Intergenerational legacies, though restricting entry only to those who can inherit good reputations from family members, resolve an end-game problem and induce merchants to deal honestly through their very last transaction. And the participation of Ultra-Orthodox Jews, for whom inclusion and participation in their communities is equally paramount to their material wealth, serve important value-added services as diamond cutters and brokers without posing the threat of theft and flight