Privacy-Preserving Network Analytics

Management Science · 2022 · 17 citations

• Computer Science
• Computer Science
• Computer Security

We develop a new privacy-preserving framework for a general class of financial network models, leveraging cryptographic principles from secure multiparty computation and decentralized systems. We show how aggregate-level network statistics required for stability assessment and stress testing can be derived from real data without any individual node revealing its private information to any outside party, be it other nodes in the network, or even a central agent. Our work bridges the gap between established theories of financial network contagion and systemic risk that assume agents have full network information and the real world where information sharing is hindered by privacy and security concerns. This paper was accepted by Agostino Capponi, finance. Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2022.4582 .

Decentralized or Centralized Control of Online Service Platforms: Who Should Set Prices?

SSRN Electronic Journal · 2021 · 8 citations

• Computer Science
• Business
• Microeconomics

Token-Weighted Crowdsourcing

Management Science · 2020 · 108 citations

• Computer Science
• Computer Science
• Computer Security

Blockchain-based platforms often rely on token-weighted voting (“τ-weighting”) to efficiently crowdsource information from their users for a wide range of applications, including content curation and on-chain governance. We examine the effectiveness of such decentralized platforms for harnessing the wisdom and effort of the crowd. We find that τ-weighting generally discourages truthful voting and erodes the platform’s predictive power unless users are “strategic enough” to unravel the underlying aggregation mechanism. Platform accuracy decreases with the number of truthful users and the dispersion in their token holdings, and in many cases, platforms would be better off with a “flat” 1/n mechanism. When, prior to voting, strategic users can exert effort to endogenously improve their signals, users with more tokens generally exert more effort—a feature often touted in marketing materials as a core advantage of τ-weighting—however, this feature is not attributable to the mechanism itself, and more importantly, the ensuing equilibrium fails to achieve the first-best accuracy of a centralized platform. The optimality gap decreases as the distribution of tokens across users approaches a theoretical optimum, which we derive, but tends to increase with the dispersion in users’ token holdings. This paper was accepted by Gabriel Weintraub, revenue management and market analytics.

Does Crowdfunding Benefit Entrepreneurs and Venture Capital Investors?

Manufacturing & Service Operations Management · 2020 · 75 citations

• Business
• Finance
• Business administration

On the Financing Benefits of Supply Chain Transparency and Blockchain Adoption

Management Science · 2020 · 628 citations

• Computer Science
• Computer Security
• Business

We develop a theory that shows signaling a firm’s fundamental quality (e.g., its operational capabilities) to lenders through inventory transactions to be more efficient—it leads to less costly operational distortions—than signaling through loan requests, and we characterize how the efficiency gains depend on firm operational characteristics, such as operating costs, market size, and inventory salvage value. Signaling through inventory being only tenable when inventory transactions are verifiable at low enough cost, we then turn our attention to how this verifiability can be achieved in practice and argue that blockchain technology could enable it more efficiently than traditional monitoring mechanisms. To demonstrate, we develop b_verify, an open-source blockchain protocol that leverages Bitcoin to provide supply chain transparency at scale and in a cost-effective way. The paper identifies an important benefit of blockchain adoption—by opening a window of transparency into a firm’s supply chain, blockchain technology furnishes the ability to secure favorable financing terms at lower signaling costs. Furthermore, the analysis of the preferred signaling mode sheds light on what types of firms or supply chains would stand to benefit the most from this use of blockchain technology. This paper was accepted by Victor Martínez-de-Albéniz, operations management.

Rethinking Crowdfunding Platform Design: Mechanisms to Deter Misconduct and Improve Efficiency

Management Science · 2020 · 145 citations

• Computer Security
• Computer Science
• Business

Lacking credible rule-enforcement mechanisms to punish misconduct, existing reward-based crowdfunding platforms can leave backers exposed to two risks: entrepreneurs may run away with backers’ money (funds misappropriation), and product specifications may be misrepresented (performance opacity). We show that each of these risks can materially impact crowdfunding efficiency, and, when jointly present, they interact with each other in ways that can dampen or, more worryingly, amplify their individual adverse effects. To mitigate these risks, we propose two mechanisms based on deferred payments. The first involves stopping the campaign once the funding goal is reached and servicing any unmet demand in the aftermarket. The second involves escrowing any funds raised in excess of the goal, as insurance for backers. We show that early stopping dominates escrow and boosts platform revenues. Pairing these deferred payment designs with (costly) performance verification contingencies can bring additional gains, but doing so can flip their relative performance, with escrow coming out on top. Overall, by accounting for different timing (pre- versus post-campaign) and enforcement rules (mandatory versus optional) of the verification contingencies, we analyze a total of 10 different designs and show that two of them dominate: the early stopping design and the escrow design with mandatory ex-post verification. We conclude by providing recommendations for which design works best under different conditions and exploring the potential of crowdsourced performance checks. This paper was accepted by Terry Taylor, operations management.

Initial Coin Offerings, Speculation, and Asset Tokenization

Management Science · 2020 · 186 citations

• Computer Science
• Computer Security
• Business

Initial coin offerings (ICOs) are an emerging form of fundraising for blockchain-based startups. We examine how ICOs can be leveraged in the context of asset tokenization, whereby firms issue tokens backed by future assets (i.e., inventory) to finance growth. We (i) make suggestions on how to design such “asset-backed” ICOs—including optimal token floating and pricing for both utility and equity tokens (a.k.a. security token offerings)—taking into account moral hazard (cash diversion), product characteristics, and customer demand uncertainty; (ii) make predictions on ICO success/failure; and (iii) discuss implications on firm operating strategy. We show that in unregulated environments, ICOs can lead to significant agency costs, underproduction, and loss of firm value. These inefficiencies, however, fade as product margins and demand characteristics (mean/variance) improve, and they are less severe under equity (rather than utility) token issuance. Importantly, the advantage of equity tokens stems from their inherent ability to better align incentives and thus continues to hold even absent regulation. This paper was accepted by Vishal Gaur, operations management.