Are Transaction Costs Drivers of Financial Institutions? Contracts Made in Heaven, Hell, and the Cloud in Between

  • James Hazard
  • Odysseas Sclavounis
  • Harald Stieber
Chapter
Part of the New Economic Windows book series (NEW)

Abstract

In 16th century Europe, the revolution in printing technology and increasing literacy in European cities created a positive shock to capital productivity. At the same time, the spread of Protestantism in Northern Europe induced individuals to honour contracts or risk exclusion from the Kingdom of God. Max Weber would argue that the religious institution of Protestantism, by dissuading defection from agreements, had allowed a new form of almost trustless exchange with strangers. Strict self-enforcing religious rules restrained individuals from opportunistic behaviour thus lowering the cost of monitoring and enforcing contracts. This led to increasing commerce and economic growth. A better capitalized, but less strict Catholic Southern Europe was unable to exert control and reduce contracting costs in the same way leading to less exchange. We argue that peer to peer technologies, such as Bitcoin, Blockchains, smart contracts, and peer-to-peer (P2P) legal platforms recall these historical evolutions. We anticipate that these technologies will reduce the cost of contracting, specifically with regards to contract monitoring and enforcement. Trustless exchange without some of the current intermediaries specializing in monitoring and enforcement technologies will have a significant impact on the financial system and its institutional structure. Moving beyond theory, this chapter discusses some of the major manifestations of technologies capable to strongly decrease the cost of contracting, and it proposes a certain class of models to explore how P2P technologies, and the concomitant reduction in transaction costs they will cause, can be expected to affect financial exchange.

Keywords

Transaction costs Property rights Transactional relationships Contracts and reputation Networks 

References

  1. Alchian, A., Demsetz, H.: The property rights paradigm. J. Econ. Hist. 33(1), 16–27 (1973)CrossRefGoogle Scholar
  2. Arrow, K.J., Hahn, F.: General Competitive Analysis. Holden-Day, San Francisco (1971)MATHGoogle Scholar
  3. Bai, J., Philippon, T., Savov, A.: Have Financial Markets Become More Informative? Working Paper, NYU Stern Business School, April (2014)Google Scholar
  4. Barzel, Y.: Economic Analysis of Property Rights, 2nd edn. Cambridge University Press (1997)Google Scholar
  5. Blum, U., Dudley, L.: Religion and economic growth: was weber right? J. Evol. Econ. 11(2), 207–230 (2001)CrossRefGoogle Scholar
  6. Capra, M.C., Tanaka, T., Camerer, C.F., Feiler, L., Sovero, V., Noussair, C.N.: The impact of simple institutions in experimental economies with poverty traps. Econ. J. 119, 977–1009 (2009)CrossRefGoogle Scholar
  7. Coase, R.: The nature of the firm. Economica 4, 386–405 (1937)CrossRefGoogle Scholar
  8. Coase, R.: The problem of social cost. J. Law Econ. 3, 1–44 (1960)CrossRefGoogle Scholar
  9. Cukierman, A.: Central bank independence and monetary control. Econ. J. 1437–1448 (1994)Google Scholar
  10. Eisenstein E.: The Printing Press As an Agent of Change. Cambridge University Press (1979)Google Scholar
  11. Escosura, L., Villarroya, I.: Contract enforcement and argentina’s long run decline. Cliometrica 3(1), 1–26 (2009). Working paper in Economic HistoryCrossRefGoogle Scholar
  12. Davies, R., Tracey, B.: Too big to be efficient? The impact of implicit subsidies on estimates of scale economies for banks. J. Money Credit Banking 46(s1), 219253 (2014)CrossRefGoogle Scholar
  13. De Grauwe, P.: Top-down versus bottom-up macroeconomics. CESifo Econ. Stud. 56, 465–497 (2010)CrossRefGoogle Scholar
  14. Diamond, D.W.: Financial intermediation and delegated monitoring. Rev. Econ. Stud. 51, 393–414 (1984)MathSciNetCrossRefMATHGoogle Scholar
  15. Diamond, J., Guns, G.: Steel: The Fates of Human Societies. W.W. Norton, New York (1997)Google Scholar
  16. Duffie, D.: The failure mechanics of dealer banks. J. Econ. Perspect. 24(1), 51–72 (2010)MathSciNetCrossRefGoogle Scholar
  17. Granovetter, M.: Economic action and social structure: the problem of embeddedness. Am. J. Sociol. 91(3), 481–510 (1985)CrossRefGoogle Scholar
  18. Greif, A.: Contract enforceability and economic institutions in early trade: the Maghribi traders. Am. Econ. Rev. 83(3), 525–548 (1993)MathSciNetGoogle Scholar
  19. Kasper, W., Streit, M.: Institutional Economics. Edward Elgar, Cheltenham (1998)Google Scholar
  20. Kiyotaki, N., Wright, R.: On money as a medium of exchange. J. Polit. Econ. 927–954 (1989)Google Scholar
  21. Marlowe, C.: The Tragical History of Dr. Faustus. Routledge (2005, first published 1604)Google Scholar
  22. Myers, S.C.: Determinants of corporate borrowing. J. Financ. Econ. 5(2), 147–175 (1977)CrossRefGoogle Scholar
  23. Nakamoto, S.: Bitcoin: a peer-to-peer electronic cash system. Consulted 1(2012), 28 (2008)Google Scholar
  24. North, C.D.: Institutions, Institutional Change and Economic Performance. Cambridge University Press, Cambridge (1990)Google Scholar
  25. Nowak, M.A., Sigmund, K.: A strategy of win-stay-lose-shift that outperforms tit-for-tat in the prisoner’s dilemma game. Nature 364, 56–58 (1993)ADSCrossRefGoogle Scholar
  26. Nowak, M.A., Bonhoeffer, S., May, R.M.: More spatial games. Int. J. Bifurcat. Chaos 4(1), 33–56 (1994)MathSciNetCrossRefMATHGoogle Scholar
  27. Olson, M.: The Logic of Collective Action: Public Goods and the Theory of Groups. Harvard University Press, Cambridge (1965)Google Scholar
  28. Philippon, T.: Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation, Working Paper, New York University (2012)Google Scholar
  29. Roberts, J.: The Modern Firm: Organizational Design for Performance and Growth. Oxford University Press (2004)Google Scholar
  30. Rodrik, D., Subramanian, A., Trebbi, F.: Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development National Bureau of Economic Research (2002)Google Scholar
  31. Shubik, M.: On understanding money. World Econ. 2, 95–120 (2001)Google Scholar
  32. Swanson, T.: Consensus-as-a-service: a brief report on the emergence of permissioned, distributed ledger systems, pp. 1–66 (2015)Google Scholar
  33. Triantis, G.: Improving Contract Quality: Modularity, Technology, and Innovation in Contract Design, p. 450. JL Bus. & Fin, Stan (2013)Google Scholar
  34. Watts, D.: Small Worlds. Princeton University Press (1999)Google Scholar
  35. Weingast, B.: The economic role of political institutions: market-preserving federalism and economic development. J. Law, Econ. Organ. 11(1), 1–31 (1995)Google Scholar
  36. Wickelgren, A.L.: Standardization as a solution to the reading costs of form contracts. J. Inst. Theor. Econ. 167, 30–39 (2011)CrossRefGoogle Scholar

Copyright information

© Springer International Publishing Switzerland 2016

Authors and Affiliations

  • James Hazard
    • 1
  • Odysseas Sclavounis
    • 2
  • Harald Stieber
    • 3
  1. 1.CommonAccord, FounderSilicon Valley, San FranciscoUSA
  2. 2.Oxford Internet InstituteOxfordUK
  3. 3.European CommissionBrusselsBelgium

Personalised recommendations