View full Paper here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3078945
by Jiri Chod (BU), Nikolaos Trikakis (MIT), Gerry Tsoukalas (Upenn Wharton), Henry Aspegren (MIT), and Mark Weber (MIT).
Nominated for an award in the Journal of Management Science. Sept 15th, 2018
Abstract
In this paper, we develop a new theory that shows signaling a firm's fundamental quality (e.g., its operational capabilities) to lenders through inventory transactions to be more efficient --- it leads to less costly operational distortions --- than signaling through loan requests, and we characterize how the efficiency gains depend on firm operational characteristics such as operating costs, market size, inventory salvage value and failure probability.
Signaling through inventory being only tenable when inventory transactions are verifiable at low enough cost, we then turn our attention to how this verifiability can be achieved in practice and argue that blockchain technology has the potential to enable it more efficiently than traditional monitoring mechanisms. To exemplify, we introduce b_verify, an open-source software/hardware blockchain system we developed to demonstrate how this technology can be implemented in agricultural supply chains, in a cost effective way.
Our paper identifies an important benefit of blockchain adoption --- by opening a window of transparency into a firm's operations, blockchain technology furnishes the ability to secure favorable financing terms at lower signaling costs. Furthermore, our analysis of the preferred signaling mode sheds light on what types of firms or supply chains would stand to benefit the most from this use of blockchains.