Buyer’s choice of a seller using smart contracts

Abstract Contractual relationships between buyers and sellers can be disrupted by unanticipated shocks to attributes of the exchanged good or service; in manufacturing, such relationships often involve one buyer of components or intermediate goods and many potential sellers. We study the buyer’s selection of a seller given the option to initially agree on a smart contract which, in the advent of such unanticipated shocks, automatically adjusts the exchange price. Our benchmark analysis focuses on the case where a positive potential shock raises attribute values for both contracting parties, implying that the seller benefits more than the buyer from executing the original contract at the agreed exchange price. Taking the perspective of the buyer, we vary the shock and utility parameters to arrive at conclusions regarding the determinants of smart contract dominance in random buyer-seller matches. One of the key issues analyzed in this paper is the possibility that after the potential shock, another seller might be better and a buyer who anticipates this might be led to select a different seller. For the case of the Nash bargaining-solution, we further investigate the impact of increasing the number of utility-generating attributes on these switch rates.