Smart Contracts in Supply Chains

Blockchain technology can generate decentralized consensus , thereby enhancing the verifiability and contractability of payoff-relevant states in a distribution channel or supply chain (e.g., seller cost and/or buyer value). Therefore, smart contracts can be written between supply chain partners such that transactions are automatically executed at state-dependent prices. The author examines the economic impacts of blockchain-enabled smart contracts on the equilibrium generation and allocation of surplus in a three-level supply chain. The model highlights the role of smart contracts in removing ex post asymmetric decision rights, which are otherwise inherently present under regular contracts where trade decisions are made based on constant transfer prices. As a result, the seller (under cost uncertainty) or the buyer (under value uncertainty) may hurt itself by signing a smart contract with the middleman, despite the improvement in the supply chain's total efficiency and surplus. Therefore, the equilibrium choice of a smart contract can be socially insufficient. Moreover, interestingly, a prisoner's dilemma may arise: The seller's and the buyer's dominant choice is the regular contract, whereas everyone would be better off if the smart contract is jointly adopted by all parties.