Lecture 11 - Self-Enforcing Contracts & Blockchain

Question 1

There are three main mechanisms defined as means of enforcing contractual agreements to cooperation and coordination - which?
A) contractual governance
B) relational governance
C) ownership governance
D) blockchain governance

Answer 1

A) contractual governance
B) relational governance
D) blockchain governance

Question 2

Contractual governance is one of the means of enforcing contractual agreements to cooperation and coordination. Which of the following are true about this mechanism?

A) the agreement takes form of enforceable promises defining the rights and obligations of the parties
B) mode of enforcement is through third parties (court, arbitrator, government authorities)
C) mode of enforcement is through the parties themselves
D) typically a formal legal form of agreement
D) typically a formal programming language

Answer 2

A) the agreement takes form of enforceable promises defining the rights and obligations of the parties
B) mode of enforcement is through third parties (court, arbitrator, government authorities)
D) typically a formal legal form of agreement

Question 3

Relational governance is one of the means of enforcing contractual agreements to cooperation and coordination. Which of the following are true about this mechanism?

A) is defined as a set of patterns of behavior to which parties are expected to conform
B) the agreement is regulated through social norms and “shadow of the future”
C) the enforcement of the agreement happens through the parties themselves
D) the mechanism is a self-contained and autonomous system of rules
E) the mechanism is mostly informal

Answer 3

A) is defined as a set of patterns of behavior to which parties are expected to conform
B) the agreement is regulated through social norms and “shadow of the future”
C) the enforcement of the agreement happens through the parties themselves
E) the mechanism is mostly informal

Question 4

Blockchain governance is one of the means of enforcing contractual agreements to cooperation and coordination. Which of the following are true about this mechanism?
A) the mechanisms is a self-contained and autonomous system of rules
B) the regulatory principle incl. protocols and code-based rules
C) it is automatically enforced by underlying blockchain-based network
D) the mechanism takes form of a formal programming language

Answer 4

A) the mechanisms is a self-contained and autonomous system of rules
B) the regulatory principle incl. protocols and code-based rules
C) it is automatically enforced by underlying blockchain-based network
D) the mechanism takes form of a formal programming language

Question 5

Shading refers to:
A) a situation where one part is opportunistic and exercises moral hazardous behavior to exploit the counterparty
B) when the attractiveness of deviating from an agreement is reduced due to repetitional transactions with the party
C) when the attractiveness of deviating from an agreement is reduced due to reputational effects
D) when a dissatisfied party cuts down on cooperativeness, ceases to be proactive, and/or fails to invest in the relationship

Answer 5

Shading refers to a situation in which D) a dissatisfied party cuts down on cooperativeness, ceases to be proactive, and/or fails to invest in the relationship

Question 6

Shading is a materialization of opportunism or moral hazard
TRUE/FALSE

Answer 6

FALSE:
Not necessarily - it is more because one party not getting the outcome expected from the relationship and feels that the party is to blame - and not because they want to enter the agreement with the intention to exploit the counterparty

Question 7

Reciprocal shading:

A) refers to situation where both parties are unhappy in a relation, and feels that the counterparty is to blame - leading to lack of incentive to invest in the relationship from both sides
B) is particularly harmful when parties hit a bad equilibrium that they cannot escape from - the reciprocal shading becomes a death spiral
C) is exemplified by the DELL and FedEx example
D) should always lead to contract termination, since the relationship results in the worst possible outcome

Answer 7

A) refers to situation where both parties are unhappy in a relation, and feels that the counterparty is to blame - leading to lack of incentive to invest in the relationship from both sides
B) is particularly harmful when parties hit a bad equilibrium that they cannot escape from - the reciprocal shading becomes a death spiral
C) is exemplified by the DELL and FedEx example

NOT D: remember, FedEx and DELL staid in the relation even under reciprocal shading, because contract termination would be more harmful

Question 8

Relational governance/contracts is one of the means of enforcing contractual agreements to cooperation and coordination. Which of the following are true about this mechanism?

A) it entails the adoption of “what is in it for WE” mentality
B) it connotes transparency about aspirations, goals and concerns between parties
C) the goal is to co-create the goals of the relation
D) a relational contract becomes formal and court-enforceable if guiding principles for the relationship is written down
E) all of the above

Answer 8

E) all of the above

Question 9

In addition to the three mechanisms; formal contractual governance, relational governance, and blockchain governance - there are two additional mechanisms - which?

A) AI governance
B) irreversible threats
C) hostages
D) contracting with multiple suppliers

Answer 9

B) irreversible threats
C) hostages

Question 10

Following statement (s) is/are true about “irreversible threat” as a enforcement mechanism:

A) it is one of the mechanisms for ensuring cooperation and coordination
B) it refers to making an irreversible action allowing a threat to become credible
C) firms with excess capacity are better able to keep potential entrants out of the industry by threatening potential entrants
D) one example of an irreversible threat is when a Spanish conquer sunk all his ships, forcing his men to fight since the only route of escape was eliminated

Answer 10

All statements are true

Question 11

Following statement (s) is/are true about “hostages” as a enforcement mechanism

A) A hostage is a credible commitment, which is forfeit in the event of contract breach
B) the size of the hostage must at least make the counterparty’s outcome from deviation and sticking to the agreement equally attractive
C) the hostage is given to the party investing in the specific asset in the event the counterparty deviates from agreement
D) imposing a hostage makes the deal self-enforcing
E) the exchange of a hostage functions as a proof of commitment and intention to enforce an agreement
F) all of the above
G) four of the abvove

Answer 11

F) all of the above

Question 12

Example: a bank deposit is set-up to be automatically transferred to the investor of the specific asset, if the counterparty breaches the ex-ante agreement (e.g., renegotiates). This is an example of:
A) shading
B) hostage
C) irreversible threat
D) relational contract/ governance
E) none of the above

Answer 12

B) hostage

Question 13

Adam Smith introduced the notion of “the shadow of the future” - what does this mean?
A) it refers to when parties are disciplined due to repeated dealings/ transactions
B) it results in a larger loss from agreement breach compared to a one-time contract
C) both of the above

Answer 13

C) both of the above

Question 14

Which of the following statements is/are NOT true about self-enforcing agreements?

A) it underlies that parties make “cheating” (e.g., shirking, moral hazard, opportunism) expensive
B) McDonald’s franchise model is an example of a self-enforcing contract
C) Ford’s $5-day is a self-enforcing contract
D) the agreement is only enforced by the parties involved (third-party enforcement such as courts are not involved)
E) the agreement is enforced by third-parties such as courts
F) the self-enforcing agreement is efficient as long as parties believe it is advantageous to stay in the contract relative to breaching it

Answer 14

E) the agreement is enforced by third-parties such as courts

IT DOES NOT INVOLVE THIRD-PARTIES

Question 15

Following is true about the Folk Theorem:
A) all positive payoff combinations can be sustained as equilibria in a repeated prisoner’s dilemma setting
B) the theorem introduced reciprocity (shadow of the future) in repeated games: if nice; nice and if not nice; not nice
C) reciprocity can sustain the efficient outcome for both players
D) all of the above
E) two of the above

Answer 15

D) all of the above

Question 16

Following is true about the tit-for-tat strategy:
A) no forgiveness is assumed: is one player deviates from the agreement, the other player will punish that player in perpetuity
B) forgiveness is assumed: the party subsequently takes the same action as the counterplayer (reciprocity), this may incentivize the opportunistic player to play nice again

Answer 16

Tit-for-tat strategy assumes forgiveness: B) forgiveness is assumed: the party subsequently takes the same action as the counterplayer (reciprocity), this may incentivize the opportunistic player to play nice again

Question 17

Following is true about the grim-trigger strategy:
A) no forgiveness is assumed: is one player deviates from the agreement, the other player will punish that player in perpetuity
B) forgiveness is assumed: the party subsequently takes the same action as the counterplayer (reciprocity), this may incentivize the opportunistic player to play nice again

Question 17

Following is true about the grim-trigger strategy:
A) no forgiveness is assumed: is one player deviates from the agreement, the other player will punish that player in perpetuity
B) forgiveness is assumed: the party subsequently takes the same action as the counterplayer (reciprocity), this may incentivize the opportunistic player to play nice again

Question 18

In a grim trigger strategy, a player cooperates in the first round and in the subsequent rounds as long as his opponent does not defect from the agreement. Once the player finds that the opponent has betrayed in the previous game, he will then defect forever - no forgiveness is assumed

TRUE/FALSE

Answer 18

TRUE

Question 19

When playing the grim trigger strategy, it is always better for the opportunistic party to stick to the agreement

TRUE/FALSE

Answer 19

FALSE: whether it is attractive to play nice or not nice depends on a comparison of the gains from first-period cheating and the future losses in perpetuity (in PV-terms)

Question 20

In a grim trigger strategy environment, if the discount rate is very high, this, all-else-equal leads to HIGHER/LOWER attractiveness of deviating from agreement

Select the right word

Answer 20

In a grim trigger strategy environment, if the discount rate is very high, this, all-else-equal leads to HIGHER attractiveness of deviating from agreement - because today’s gain will be worth relatively more than tomorrow’s losses

Question 21

What are the determinants for stability in a relationship?
A) costs and benefits of ending a relationship by cheating
B) the reputation of the parties involved
C) the history of the relationship
D) observability of decisions
E) hostages in the relation and the size hereof
F) all of the above
G) four of the above

Answer 21

G) four of the above

CORRECT:
A) costs and benefits of ending a relationship by cheating
C) the history of the relationship
D) observability of decisions
E) hostages in the relation and the size hereof

Question 22

Bilateral governance - i.e., self-enforcing contracts - are useful when transaction frequency is HIGH/LOW and when asset specificity is (LOW-MEDIUM/ MEDIUM-HIGH)

Choose the right words

Answer 22

Bilateral governance - i.e., self-enforcing contracts - are useful when transaction frequency is HIGH and when asset specificity is MEDIUM-HIGH

Question 23

Transaction cost economics argue that typically, high asset specificity and high transaction frequency should result in hierarchy (internalization) - but that bilateral governance (self-enforcing contracts) may be sufficient

TRUE/ FALSE

Answer 23

TRUE

Question 24

What are the advantages of self-enforcing agreements?

A) reduces transaction costs
B) allows for contracting when third-party enforcement is no accessible/possible
C) allows for more flexibility
D) increases the transparency for both parties, allowing for quicker detection of any potential agreement breach
E) all of the above

Answer 24

A) reduces transaction costs
B) allows for contracting when third-party enforcement is no accessible/possible
C) allows for more flexibility

Question 25

Lower transaction costs is one of the advantages from engaging in a self-enforcing contract. How so?

A) the costs associated with drafting a formal contract is saved
B) the cost of hiring lawyers and other third-parties for enforcement is eliminated
C) both of the above

Answer 25

C) both of the above

Question 26

Vertical integration is the option of last resort, and shall only be pursued when contracts are pushed out of their self-enforcing range

TRUE/FALSE

Answer 26

TRUE

Question 27

Vertical integration may be sensible when:
A) The gains from holdup > sanction from holdup
B) synergies can be realized from related diversification
C) when contracts are pushed out of their self-enforcing range
D) A and C
E) B and C

Answer 27

D) A and C

Question 28

What are the impacts from blockchain governance on the ex-ante transaction costs?
A) reduces costs of assessing trustworthiness of partners
B) brings about significant set-up costs (incl. codifying transactions)
C) reduces cost of dispute resolution
D) all of the above

Answer 28

A) reduces costs of assessing trustworthiness of partners
B) brings about significant set-up costs (incl. codifying transactions)

C) is an impact on ex-POST transaction costs

Question 29

What are the impacts from blockchain governance on the ex-post transaction costs?
A) reduces cost of monitoring
B) reduces cost of dispute resolution (everything is transparent)
C) eliminates moral hazard and opportunism

Answer 29

A) reduces cost of monitoring
B) reduces cost of dispute resolution (everything is transparent)

Question 30

By employing blockchain governance as a mechanism for ensuring coordination and coordination, costs are saved with respect to assessing the trustworthiness of transaction partners - how so?

Answer 30

Being willing to commit to the blockchain itself sends a signal of the party having nothing to hide

Question 31

With respect to the scope/usefulness of blockchain governance, which of the following statements are true?

A) it is particularly useful in settings with anonymous actors
B) it is particularly useful in settings with actors being placed in different jurisdictions
C) it is less useful for transactions that involve much tacit knowledge
D) it is particularly useful for “search goods”
E) it is less useful for transactions that involve much explicit knowledge

Answer 31

A) it is particularly useful in settings with anonymous actors
B) it is particularly useful in settings with actors being placed in different jurisdictions
C) it is less useful for transactions that involve much tacit knowledge
D) it is particularly useful for “search goods”

Question 32

Blockchain governance is in particular useful for transactions involving “search goods”. What characterizes such goods?
A) characteristics, quality and features of the product are difficult to evaluate and verify before purchase
B) it is synonymous for credence goods
C) characteristics, quality and features of the product are easily evaluated and verified before purchase

Answer 32

Search goods: C) characteristics, quality and features of the product are easily evaluated and verified before purchase

Question 33

What are credence goods?