Modeling Insurance Marketplaces using Contract theory

Recently Sheth and Subramanian, published a paper in Managerial Finance, titled “Blockchain and contract theory: modeling smart contracts using insurance markets”. The paper describes smart contracts in light of contract theory. The authors introduce the concept of smart contracts and discuss the implementation of a decentralized insurance marketplaces, using Etherisc an insurance marketplace for smart contracts running on the Ethereum blockchain platform.

The authors employ three methods in this paper. The first one is a design illustration of a live application, namely, Etherisc. The second one is an economic model using demand–supply and equilibrium economics. The third one is an illustration using principal–agent modeling using constrained optimization.

The authors demonstrate the architecture of a live Ethereum-based smart contract system.
Using this economic model, the authors illustrate how decentralized smart contract systems can increase social welfare by shifting demand and supply by reducing transactional costs. In the principal–agent model, the authors show how both the principal and agent are positively benefited by various mechanisms.

The paper can be downloaded from here if you have access to a library in the USA