Can Blockchain Solve the Hold-up Problem in Contracts?

Richard Holden and Anup Malani

No 25833, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Two parties sign a contract but before they fully perform they modify the contract. Should courts enforce the modified agreement? The modification may enable efficient trade in response to changed circumstances, or one party may have made an efficient relationship-specific investment and then been held-up by the other. Courts have had difficulty tackling this problem because the facts required to discriminate between the two situations are non-verifiable. A private remedy is for the parties to write a contract that is robust to hold-up or that makes the facts relevant to modification verifiable. But implementing such remedies requires commitment to the provisions, i.e., they themselves are subject to non-compliance. Conventional contract technology, e.g., the use of liquidated damages, to ensure commitment are disfavored by courts and subject to renegotiation. Smart contracts written on blockchain ledgers may offer a solution. We explain the basic economics of these technologies. We argue that they can used to implement liquidated damages without court involvement and thereby obtain commitment to renegotiation design and revelation mechanisms. We address the hurdles courts may impose to use of smart contracts and argue that sophisticated parties’ ex ante commitment to them may lead courts to allow their use as pre-commitment devices.

JEL-codes: D82 D86 K12 (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-bec, nep-cta, nep-law, nep-mic and nep-pay
Note: LE
References: Add references at CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://www.nber.org/papers/w25833.pdf (application/pdf)

Related works:
Book: Can Blockchain Solve the Hold-up Problem in Contracts? (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:25833

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w25833

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().