The Bright and Dark Sides of Smart Contract in Tariff-Sensitive Global Procurement

Abstract

Self-executing smart contract is believed to revolutionize global procurement by eliminating payment delay and enhancing transaction efficiency. This paper studies the value of smart contract in global procurement, and how the tariff regulations (specific tariff and ad valorem tariff) would affect the retailer’s preference of adopting smart contract. Compared to traditional contract, the adoption of smart contract alleviates the supplier’s cost pressure while induces the retailer’s cash opportunity cost. Therefore, whether to adopt smart contract in global procurement becomes the retailer’s strategic and practice-relevant decision. The investigation of import tariffs also appears new in the literature. We develop a game-theoretical model consisting of a retailer and an overseas supplier, where the retailer resells the supplier’s products and also sells self-brand products under the regulation of either a specific or an ad valorem tariff. Under both the tariffs, the retailer adopts either the traditional contract or smart contract to procure from the supplier. We identify interesting interactions among tariff regulations, the supplier’s pricing decisions, and the value of cash opportunity cost (information update) under smart contract (traditional contract). We find that an increased specific tariff reduces the retailer’s incentives to adopt smart contract, while an increased ad valorem tariff could strengthen the retailer’s incentives to adopt smart contract. Interestingly, we find that, if the retailer faces high demand uncertainty, smart contract could be more profitable given the retailer’s low cash opportunity cost and a moderate ad valorem tariff rate. Our results can be insightful for the retailers who plan to adopt smart contract but worry about the cash opportunity cost issues. We uncover the rationales of import tariffs promoting or hindering the FinTech (Financial Technology) adoption in global procurement.