Can Blockchain Solve the Hold-up Problem in Contracts?

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Richard Holden (University of New South Wales, Sydney) Anup Malani (University of Chicago)

Can Blockchain Solve the Hold-up Problem in Contracts?

Richard Holden (University of New South Wales, Sydney), Anup Malani (University of Chicago)

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English

Cambridge University Press
18 November 2021

Politics & government; Public administration; Economics & Business; Law & society; Legal system: general

Series: Elements in Law, Economics and Politics

Summary
Details

A vexing problem in contract law is modification.

Two parties sign a contract but before they fully perform, they modify the contract. Should courts enforce the modified agreement? 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.

Provisions accomplishing these ends are renegotiation-design and revelation mechanisms. But implementing them requires commitment power. Conventional contract technologies to ensure commitment – liquidated damages – are disfavored by courts and themselves subject to renegotiation. Smart contracts written on blockchain ledgers offer a solution. We explain the basic economics and legal relevance of these technologies, and we argue that they can implement liquidated damages without courts. We address the hurdles courts may impose to use of smart contracts on blockchain and show that sophisticated parties' ex ante commitment to them may lead courts to allow their use as pre-commitment devices.

By: Richard Holden (University of New South Wales Sydney), Anup Malani (University of Chicago)
Imprint: Cambridge University Press
Country of Publication: United Kingdom
Edition: New edition
Dimensions: Height: 229mm, Width: 151mm, Spine: 4mm
Weight: 100g
ISBN: 9781009001397
ISBN 10: 1009001396
Series: Elements in Law, Economics and Politics
Pages: 75
Publication Date: 18 November 2021
Audience: General/trade , ELT Advanced
Format: Paperback
Publisher's Status: Active