Transaction Costs, Institutions and Blockchain Technology: Toward A New Paradigm

Abstract

Blockchain technology has the potential to disrupt many of the assumptions that we currently hold about market transactions, the role of institutions and the nature of the firm. As a result of this new technology, market transactions may be conducted between decentralized, autonomous economic actors at much lower costs, with less uncertainty, and without central control by governments in the form of formal institutions. The latter aligns with the vision of Adam Smith two and a half centuries ago (Smith, 1776 [1976]) and so, possibly for the first time, markets could become true price-driven exchanges between suppliers and consumers. Blockchain technology also challenges the key assumptions underpinning the existence of the firm (Coase, 1937) as it has the potential to reduce the cost of search, contracting, coordination and the establishment of trust. When realized, this potential may lead to the emergence of new ways to organize economic activities. Accordingly, blockchain technology may be the next wave of disruption for intermediated transactions in many contexts, by reducing and possibly eliminating the need for market agents. Due to its relative novelty, however, discussions about blockchain technology have so far predominately centered on technical aspects and its first application - the cryptocurrency bitcoin. This paper attempts to elevate the discussion beyond those confines and into the realm of organization and management theory by exploring how the diffusion and application of blockchain technology may advance well-established theories, namely transaction cost economics, agency theory, and institutional theory.