Blockchain technology and the theory of the firm

Abstract When is it cheaper to coordinate production inside a hierarchical firm rather than across an open market? As per the classical theory of the firm developed by Coase and Williamson, hierarchy wins in a low-trust, complex environment, as a hierarchical firm can economize on the cost of verifying, coordinating, and executing transactions. Blockchain technology upsets this calculus: it distributes the verification work that a central authority would otherwise perform and so changes the cost logic on which the classical prediction rests. This paper asks: how much is that difference? We build a simulation to evaluate four governance frameworks: traditional manual coordination without shared infrastructure, a centralized hub, a permissioned blockchain run by a subset of member firms, and a fully distributed blockchain. Each framework's coordination cost follows from an explicitly specified capacity structure, and every reported number can be regenerated from deposited code. Three findings stand out. First, digitization matters most in our model: all three digital arrangements improve on manual coordination, though this ordering and the size of the gap are set by our assumptions about manual effort. Second, distributed verification holds a real but bounded advantage over a centralized system, and it shrinks when the centralized alternative spreads its coordination load across several hubs (Sect. 4.9). Third, the advantage appears widest under a high complexity, low-trust environment, exactly where the classical theory expects hierarchy to perform best, a pattern that rests on assumptions we state openly and vary. Because our centralized arrangement carries hierarchy's congestion costs without its adaptive benefits, the results speak to one dimension of the classical question, the information-processing cost of coordination, and on that dimension only. Blockchain shifts the balance between markets and hierarchies; it does not overturn transaction cost economics.