Economics of Permissioned Blockchain Adoption

Abstract

We construct an economic framework for understanding the incentives of the participants of a permissioned blockchain for supply chains and other related industries. Our study aims to determine whether adoption of blockchain is socially beneficial and whether such adoption arises in equilibrium. We find that blockchain reduces information asymmetry for consumers, thereby enhancing consumer welfare. Consumer welfare gains can be sufficiently large that blockchain adoption is socially beneficial; nonetheless, we find that blockchain adoption does not arise in equilibrium. This situation arises because blockchain adoption costs are borne by manufacturers, and manufacturers cannot extract consumer gains through prices due to the competitive nature of the manufacturing sector. We offer a system of transfers to generate blockchain adoption in equilibrium when it is socially beneficial. This paper was accepted by Vishal Gaur, operations management. Funding: This research was partially supported by a seed grant from the Columbia–IBM Center for Blockchain and Data Transparency. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.4532 .