Can Smart Contracts Ameliorate Adverse Selection in the Market for Second Hand Goods?

Abstract

The essay explores how the advent of blockchain technology can augment digitally encoded smart contracts to replace trust-based third-party functions of verification and enforcement. Recent literature suggests that distributed and decentralized ledger of transactions could be leveraged to not only reduce transaction costs but also mitigate asymmetries of information. The essay endeavours to theoretically model and assess transactions on blockchain platforms via smart contracts versus conventional spot market trade. The essay finds that asset-quality delineation mechanism, history of similar transactions on the platform as well as associated verification costs play a key role in affecting incentives of buyers and sellers to trade using smart contracts.