Blockchain and the Value of Operational Transparency

Jiří Chod, Carroll School of Management; Nikos Trichakis, MIT Sloan School of Management; Gerry Tsoukalas, Operations, Information and Decisions, The Wharton School; Henry Aspegren, Tsinghua University; and Mark Weber, MIT-IBM Watson AI Lab

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 effciently 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 blockchain technology.

Read the full working paper here (PDF).