Transaction cost theory

Sum

Cost of
Cost peripheral cost

Transaction
cost
Block chain size

Asset
Opportunism Assumptions on human behavior
Framework

specificity • Bounded rationality

• Opportunism
Transaction
frequency
Transaction Governance cost
cost & structure
Environmental
Uncertainty
Advantages Challenges
Bounded Permanent Privacy
Behavioral
rationality Data quality
Uncertainty Immutable
Trust Network effect
Transparent Uncertainty
 One of the major challenges of
Safeguarding blockchain adoption is the lack of
standardization
 The safeguarding problem arises when one party of a transaction has to invest in specific
assets that have little to no value outside that one particular relationship
 In general, blockchain can prevent direct misbehaviour and at least deteriorate
elaborate forms of opportunistic behaviour. Blockchain creates a (mostly)
tamperproof and permanent record of past transactions, thus making misbehaviour
visible and traceable.
 Consequently, the thread of exposure might prevent at least the more obvious ways
of theft, fraud, or manipulation, since hiding in sloppy processes and incomplete
paper trails is eliminated
 In addition, smart contracts can limit opportunistic behaviour, as the smart contract
can determine exchange parameters and enforce its execution
 The costs of safeguarding against opportunistic behaviour, such as unfair pricing,
and dependency issues do not justify a market solution
 In general, blockchain reduces the prevailing risk of opportunistic behaviour in
exchange relationships. The safeguarding problem is characterized uniquely by high
levels of power asymmetry and dependency. Power asymmetries are always a
challenge in every supply chain relationship

Proposition 1. Blockchain limits opportunistic behavior in transactional relationships.

 Performance evaluation

INPUTS Key activities Key outcomes OUTPUTS

• Blockchain • Management • Engaged • Blockchain
• Business • People • Defined • Business
• GRC • Process • Planned • GRC
• Technology
• Acquisition

 Given a fully public infrastructure, even the consumer can potentially retrace the firm's
actions, providing a completely new level of product and service transparency.
 Transparent product provenance can prevent fraud and counterfeit and thus save costs
related to controlling and monitoring current and potential suppliers and ensuring
product or service quality.
 While blockchain offers a range of benefits to the performance measurement problem,
opportunistic behaviour persists at the earliest stages of data input, potentially adding
unforeseen governance cost.
 The programmability of blockchain may even enable “automated quality control” and
performance evaluations based on machine learning tools.

Proposition 2. Blockchain reduces behavioural uncertainty in transactional relationships.

 Transaction cost theory prescribes that the firm should
Adaption govern transactions under high levels of environmental
uncertainty internally to avoid adaption and renegotiation
Peak of costs
inflated
Plateau of
expectation
Visibility Slope of productivity
Through of enlightenment
Technology disillusionment
trigger
Maturity
 The adaptation problem originates from the difficulty to draft complete agreements
under conditions of high environmental uncertainty.
Source >Supply >Demand >technologies >Regulations >Economic shifts
 Blockchain creates transparency in providing reliable real-time and historical data and
facilitating secure corporate data warehousing
 Blockchain potentially improves transparency along the supply chain, since it
enhances information sharing between business partners and creates supply chain
visibility beyond Tier 1
 However, we imagine a crucial trade-off between data sharing on blockchain and
corporate data privacy.
Proposition 3. Blockchain reduces the impact of environmental uncertainty in
transactional relationships.

Proposition 4. Blockchain enables more market-oriented governance

structures for transactions under high environmental uncertainty.
Framework of blockchain impact areas
Ease of adoption

Potential business impact

Process Data
criticality confidentiality

Cycle time reduction Effort elimination

Ancillary benefit
potential potential
Process Existing technology
reengineering need investment

 Potential for the technology to reduce transactional complexity, information asymmetry

and contractual incompleteness.
 Supply chain risks decrease due to traceability and openness of transaction and
agreement records.
 The technology reduces costs for gathering and processing information, drafting and
negotiating contracts, monitoring and enforcing agreements, and managing
relationships, allowing for more market-based governance structures under certain
circumstances

Proposition 5. Blockchain reduces transaction costs.

Proposition 6. Blockchain influences governance cost and structure.