Principal agent theory and blockchain technology: Smart contract applications

Abstract

When economic agents have private information, the agents will be incentivised to use this information advantage by acting in a manner that does not always coincide with production and social efficiency, or the interests of the principal. This thesis investigates details specific to designing a contract with blockchain technology and smart contracts that consistently elicit efficiency and good behaviour with the best possible outcome for participating agents. We use the lens of the principal agent theory to show that implementing blockchain technology and smart contracts in contractual agreements can alleviate problems associated with information asymmetry that arise when one party holds its information private. Information asymmetry has a significant economic impact in principal agent relationships.