Blockchain Technology as an Instrument for Corruption Risks Minimization in the Principal-Agent Model

Размещено на http://www.allbest.ru/

Blockchain Technology as an Instrument for Corruption Risks Minimization in the Principal-Agent Model

Abstract

blockchain technology corruption

Corruption being the reason of principal-agent problem can be eliminated by introduction of blockchain technology into the system of interconnection between principal and agent. The results are obtained by exploring both theoretical framework of agent theory and it's practical applications, and blockchain technology and its latest implementation in Estonia, Georgia and Sweden. The results of this research lend support to the two hypotheses tested: 1) implementation of blockchain technology can contribute to resolving corruption related problems of principal-agent model and minimize the level of corruption connected with interactions between citizens and governmental bureaucratic structures; 2) blockchain technology can increase level of public trust in political institutions.

Introduction

Topicality. Corruption is a widespread phenomenon that could be met in different spheres of interaction between individuals. It is not necessary to prove that economic and social impact of corruption is harmful, and that this problem concerns everyone. Of course, economic and political consequences of bribes, fraud, nepotism are significant but the more crucial thing is that corruption kills people: corruption is also about terrorism, about the absence of fair access to water sources, land and development. Attempts to reduce the level of corruption by traditional popular anticorruption instruments, for instance, extensive police investigations, legislation optimization, bureaucratic simplifications have partly demonstrated their effectiveness but also inability to overcome corruption completely. The implication of these instruments is a significant factor of corruption reduction but they never lead to complete corruption elimination.

The prevailing theoretical framework of corruption research is the agency theory (Ugur, Dasgupta, 2011). According to this approach, the corruption problem is a product of principal-agent relations, where an agent takes actions on behalf of a principal and has an advantage in information. The general problem highlighted in this approach is an asymmetry of information: an agent could use his information advantage to get the own benefit (Mitnick, 1976). The lack of trust between principal and agent relates to a deep distrust of citizens to political institutions. The corruption risks of asymmetry of information between principal and agent could be minimized by implementation of new technologies within bureaucratic structures. The best option tested so far that could bring significant effect is blockchain technology.

The blockchain technology is a basis of the first successful cryptocurrency “Bitcoin” which was created in 2008 and extended the boundaries of the world economic system. Since that time, an enormous number of scientists and people in business have paid attention to blockchain and found that distributed ledger (blockchain) has a wider range of its implementations not only in finance but in public sphere too. However, there are no attempts to research blockchain technology from the political science perspective.

Corruption being the reason of principal-agent problem can be eliminated by introduction of blockchain technology into the system of interconnection between principal and agent. It is a significant research field that should be considered by academic society.

The subject of the research are relations between citizens and a government in the principal-agent model. The object is blockchain technology implementation effect on the principal-agent system.

The research questions of this research is how blockchain technology implementation could minimize corruption occurrence in the principal-agent model and increase the level of trust to political institutions.

The objective of this study is to investigate the significance of blockchain technology implementation for corruption elimination and problem of distrust to political institutions resolving.

For realization of this research, the following tasks are to be completed:

1. To outline the definition of principal, agent and corruption relying on classic and modern research on these topics;

2. To describe basics of blockchain technology and ways of its implementation;

3. To examine the research that has been made in the field of blockchain theory in relation to public sector;

4. To select appropriate cases that demonstrate positive use of blockchain technology in public sector;

5. To describe chosen cases and analyze them.

The theoretical paradigm of this research is rational choice institutionalism.

The method is case-study.

The hypotheses of the research are as follows:

Hypothesis 1

Implementation of blockchain technology can contribute to resolving corruption related problems of principal-agent model and minimize the level of corruption connected with interactions between citizens and governmental bureaucratic structures.

Hypothesis 2

Blockchain technology can increase level of public trust in political institutions.

Delimitations of the research are associated with restrictions for case-study sample. Blockchain is a new technology and very few cases of its application by government has been implemented in practice so far. The cases, which have been chosen for the research relate to the political sphere, while examples of successful implementation of blockchain technology in financial and other areas are not being used. Because of the recent emergence of blockchain technology all selected cases belong to the last 5-7 years.

Theoretical significance

This study proposes theoretical explanation of blockchain technology working principle from agency theory perspective, and how problems of corruption and distrust to political institutions could be resolved due to principal-agent issues solution with blockchain implementation.

Practical significance

1. This work can be a platform for further research in the field of corruption and the agency theory.

2. This research contributes to the corruption prevention sphere, describing the significance of the blockchain technology implementation.

Problem statements

1. Blockchain implementation eliminates the principal-agent problems.

2. Blockchain technology solves the general problem of people distrust in political institutions.

3. Blockchain technology implementation in government sector is a logical sequence of global digitalization

Chapter 1. Theoretical foundations of principal-agent model

Scholars researching agency theory could be divided according to differences in their approaches. Some scholars employ mathematical modeling of the principal-agent problem (e.g. Baiman, 1982), the “Rochester school” developed an approach to agency theory research based on integration of theory of firms elements, transaction costs concept, etc. (e.g. Zimmerman, 1977; Jensen and Meckling, 1976), others “blend elements of the economics heritage with concern for sociological variables such as norms, organization theoretic concepts like control and authority, and questions of organizational behavior, societal function, and institutional evolution” (Eisenhardt, 1989; Mitnick,1973; Mitnick, 1984).

Another categorization suggests two following streams: positivist agency theory (Jensen and Meckling, 1976) and principal-agent research (Demski & Feltham, 1978; Haris & Raviv, 1979). Representatives of the first group pay attention to cases where controversial relations between principal and agent could emerge and explore how to regulate such relationships and avoid specific problems. The principal agent research is more formal and abstract, this stream highlights assumptions and specifications of the principal-agent model, using the mathematical modeling and other formal instruments (Eisenhardt, 1989).

This research deserves to highlight major lines and aspects of agency theory. Hence, three foundational works that formed the common principal-agent concept were chosen for more detailed analysis.

Stephen Ross (1973) and Barry Mitnick (1973, 1974, 1976) are the originators of agency theory, who formed main theoretical foundations of this field. Mitnick developes agency theory in political science, emphasizing institutional factors of agency theory. He provided future scholarsh with basis for implementing agency theory in the political sphere. Ross formulated economic aspects of the agency theory (Shapiro, 2005).

Jensen and Meckling provided explanation of the relations between owners and managers and an origin of the problem (Jensen & Meckling, 1976). As a result, popular definition of the principal-agent relations was formulated and different factors that influence this principal-agent interaction were highlighted. Being economists, Jensen and Meckling have paid attention to the problem associated with relations between owners and manager inside companies and firms. They have used theoretical elements from theory of property rights, theory of agency, theory of finance to evolve theory of the ownership structure.

The key dilemma that highlights the conflict between owners and managers was also mentioned by Adam Smith. He has observed, that owners of companies, being managers at the same time, have the most reverent attitude to decision-making process, because the results of their actions directly influence success of the company, while the latter influences the capital of the owners. Moreover, hired managers often don't have such attitude to the company and easily could use their managing resource not in the interests of the owners. All concepts mentioned above explains why contract relations are a possible catalysator of the occurrence of the problem related to such type relations. (Smith, 1776)

Jensen and Meckling have defined “an agency relationship as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent” (Jensen, Meckling 1975). Вoth principal and agent try to maximize their utility in process of contract relations. Hence, interests of an agent could differ from interest of owners. The latters have to find opportunities to have instruments for an agent actions control, because in the case when the agent tries to maximize his own utility the principal interests are usually not satisfied. One of the tools that can resolve the problem of agent's behavior deviation from principal purpose is to conduct right incentives for an agent and to start a monitoring process. The process is be a cost laying on principal's shoulders, nevertheless, an agent also incurs bonding costs associated with the contractual arrangement. Moreover, it seems impossible to avoid deviations between agent actions and decisions that increase the welfare of the principal even in the case of successful monitoring. It could be named residual loss.

So, Jensen and Meckling argued that agency costs contain:

1)The monitoring cost by principal;

2)The bonding cost;

3)The residual lost.

Jensen and Meckling found out using mathematical modeling that in the case of hired managers, agency costs are none-zero. However, agency costs could be equal to zero in two cases: 1) when the monitoring is absent, and 2) when all managers are owners at the same time.

This vision of agency theory served as a foundation for many research on different topics implementing and analyzing principal-agent model. Despite the fact that the work of Jensen and Meckling is mostly related to the financial sphere, the core idea of principal-agent relations is used in other spheres.

The vision of agency theory and its positioning as a tool provided by Mitnick can be used to understand processes in public sphere, where the state is agent, bureaucrats are agents too, and citizens are principals (Mitnick, 1984). Scholars researching principal-agent concept argue that “the political system can, of course, be understood as a complex network of principal-agent relationships composed of citizens, nation states, elected officials, lawmakers, members of the executive branch, administrative agencies, courts, international organizations, ambassadors, bureaucrats, soldiers, police officers, supervisory officials, civil servants, patronage appointees, and even those who monitor other agency relationships inside political institutions and in the market. These actors concurrently play principal and agent roles within and across political organizations.” (Shapiro, 2005)

Mitnick describes principal agent problem quite similar as Jensen and Meckling do. It is argued that principal-agent problem emerges when the agent acts on behalf of principal. There are divergences between how agents act for the benefit of principal, and how principals as self-directed actors do. One of the general ideas is that agency relations permeate a great part of spheres of interaction between people as political and as nonpolitical actors - general concept of politics contains elements of the agency theory. Theoretical foundation of provided notion is based on classical definitions of “politics” and political science: by Tussman (1960); by Lasswel and Kaplan (1950); “politics describe social situations in which the dominant of primary relations are those between superior and subordinate”(Tullock, 1965); “the authoritative allocation of values in society” (Easton, 1953) - like one of the most cited definitions. Hence, authorities as agents should distribute values for society which is a principal. The logic of principal-agent relationships could be found in political institutions (legislatures, bureaucracy, government) and politics as a general concept.

The general problem is an absence of perfect agency when agent actions perfectly match with the interest of the principal. Perfect agency failure could occur in different ways, and it should be taken into account that problems which were mentioned by Mitnick are connected with agency costs of Jensen and Meckling.

The first issue is that agent's behavior should match with principal interests. This problem could be divided into two subproblems: (1) principal should take part in monitoring process of agent's behavior, (2) and judge whether agent's actions are optimal or not.

Judging about the optimality of agent's behaviour is a problem for principal, because he have no expertise or have not enough information about agent's actions, because of specific circumstances. Hence, the third (3) subproblem occurs when the principal cannot differentiate whether the results of agent's behavior are good or not.

Barry Mitnick argues that it is necessary to keep in mind that principal could either observe the behavior of an agent, or not. The second important category is that principal can judge optimality of agent behavior, or not. The kind of problem affecting the agency relations depends on the combination of principal abilities. Moreover, problems occur when preferences of the agent and the principal are contradictable or alternative sources of reward for the agent exist. Both asymmetry of information and possibility of absence preventive actions a priori in the principal-agent relations are significant factors. The following four problems occurs in case of information asymmetry:

Moral hazard

The problem of moral hazard emerges when a principal has an ability to estimate the effectiveness of agent's actions but can't observe them. Hence, he also can't change or correct actions of an agent. Attempts to estimate the agent effectiveness using different proxies could fall, because different kind of measurement distortion exist, for instance, agent can manipulate the data. In a result, the agent can act more for own interests, than for principal's aims. This problem was also mentioned by Eisenhardt (Eisenhardt, 1989).

Adverse selection

Adverse selection problem may be observed in a situation when the principal is able observe actions of the agent, but has no expertise to judge the optimality of these actions. Such circumstances could provide an opportunity for the agent to manipulate the principal and satisfy own interests. It is necessary to notice that as in the case of moral hazard, the principal also can use proxies and surrogates for agent efficiency estimation. This problem was also mentioned by Eisenhardt (Eisenhardt, 1989).

Blind trusteeship

The situation of blind trusteeship emerges when the principal is able neither to observe actions and behavior of the agent, nor to produce optimal judgements of them. Such phenomenon could be met in big corporations and complicated bureaucratic structures.

Perfect policing

Perfect policing is an ideal situation occurring in relations between principal and agent, when the principal is able both to observe and to judge behavior of the agent.

Fiduciary norm is another central concept of agent theory. It is a social concept that constructs circumstances in which agent has intentions to perform for principal aims. Assuming agent's discretion, if he has fiduciary norm, he tends to maximize the outcome of principal.

Three norms could be associated with fiduciary norm:

1)Confident relations between agent and principal;

2)Full disclosure of information including possible ways of agent's alternative rewards;

3)Proper conduct of the agent.

It could be concluded that principal-agent problems, such as asymmetry of information, agency costs, monitoring, moral hazard, and adverse selections occur in case when agent acts on behalf of principal and their interests contradict to each other, and there are opportunities for agent to use alternative sources of reward. One of the most important aims of agency theory research is to find out solutions of principal-agent problems. The information and its distribution between principal and agent is the crucial aspect of relations and the reason for occurrence of the problem. Corruption and bureaucracy ineffectiveness are considered to be a product of principal-agent relations, where principal cannot observe agent actions and judge their optimality - there is the lack of accountability (Klitgaard,1988).

Chapter 2. Agency theory and Corruption

Now the principal-agent concept is one of the most prevailing theories to research corruption. It has been confirmed by a meta-analysis of 115 work on corruption topic (Ugur & Dasgupta, 2011).

Nevertheless, there is an opinion that the collective action concept is a more appropriate approach to research corruption (Persson, Rothstein & Teorell 2013; Mungiu-Pippidi, 2011; Bauhr & Nasiritousi 2011; Rothstein 2011). The agency theory suggests that corruption is a result of the lack of accountability: the principal cannot control an agent. However, representative of collection action problem stream argues that “systemic corruption persists because corruption is widely perceived to be the norm in such contexts, and individuals gain little from abstaining from or resisting corruption if they cannot trust that others will do the same.” (Marquette, Peiffer, 2015) .

The counterargument to this notion is that the corruption is always connected with principal-agent problems, at the same time the collective action problem is often the reason for corruption occurrence. It is not appropriate to characterize the agency theory as inapplicable to corruption research and explanation (Stephenson, 2015). The principal-agent theory and collective action explanation of reasons for corruption occurrence are not contradictable but complemental ((Marquette, Peiffer, 2015) .

This research considers corruption as a result of the principal-agent relations.

Scientists, who are the proponents of agency theory, argue that corruption emerges when officials use an administrative resource, which is delegated by citizens, for personal interests. It is possible because the principal-agent problems arise, for instance, through asymmetry of information or monitoring problem. The giant of political science Susan Rose-Ackerman argues “the person bribed must necessarily be acting as an agent for another individual or organization since the purpose of the bribe is to induce him to place his interest ahead of the objective of the organization for which he works.” (Rose-Ackerman, 1975). It also operates in the case of relations between officials and citizens. Susan Rose-Ackerman was one of the first scientists who implemented the theory of agency in research of corruption, so established the tradition of principal-agent concept usage (e.g. Klitgaard 1988; Bardhan,1997).

The corruption prevention is also in direct connection with the principal-agent relations because the latter has a direct impact on corruption occurrence. The researchers of anti-corruption policies tried hard to find ways to minimize impact of the principal-agent model by providing transparency and accountability to the societies. It is recognized that, for example, implementation of th e-procurement system had a positive effect on the principal-agent problem by reducing the level of corruption. Such phenomenon as the implementation of e-government system by the countries is also has a great impact on corruption elimination (Organization for Economic Co-operation and Development (OECD), 2005; United Nations Development Program (UNDP), 2006; Andersen, 2009).

There is another opinion that e-government system implementation could not resolve the corruption problem but also produce new corruption niche (Bhatnagar, 2003). This argument seems quite provable. E-government could increase the level of transparency and accountability, but even in such circumstances, some officials can try to deceive citizens due to manipulation with information. The e-government implementation per se doesn't liquidate asymmetry information problem. While data storing is predisposed to manipulating by officials, the corruption risks are high.

The asymmetry of information occurrence relates to the principal-agent relations as a catalyzer for another serious problem, which is citizens distrust to political institutions and officials. The rates of Russian citizens' trust to the different political institutions after parliament elections in 2016 are critically low. For instance, the level of political trust to the legislatures is 22%, to the government is 26%. (Muhametshina, 2016)

The dramatically low level of confidence to the general political institutions is the result of the great lack of accountability and transparency in Russia. The absence of monitoring mechanisms is a crucial thing that stimulates the intensity of information asymmetry between principal and agent that affects the level of corruption. Russia takes 131 place in Corruption Perception Index in 2016, what means very corrupted. (CPI, 2016) The principal cannot control agent actions in Russia. The emergency steps should be taken to increase the trust level to the political institutions and the level of accountability and transparency of public administration. The implementation of the electronic solutions for bureaucratic process optimization, for instance, e-governance, as it was mentioned earlier, has a positive influence on corruption prevention and increasing of accountability but changing process can take a long time before the first results emerge. The essential idea is that one of the best ways to increase the quality of agent action's control is to eliminate the possibility that the data can be used in bureaucratic working processes for illicit means, or can be illegally deleted, changed, manipulated by the official. The implementation of the blockchain technology can resolve the problem of the principal-agent relations optimization by providing a revolutionary approach of the data keeping and data exchange.

Chapter 3. Blockchain technology

Blockchain has appeared on the market in October of 2008, as a technology for cryptocurrency named Bitcoin. The main feature of this cryptocurrency is decentralized emission, approval of transactions and transfer of ownership. Bitcoin was the first blockchain technology implementation.

Now business and governmental bureaucratic structures should constantly account all transactions. It is necessary because collected documents demonstrate transactions history that is the general instrument for forecasting and planning activities. The transactions demonstrate not only how the company works, but how it establishes external relations. Every company, firm or government department has their own way of documents accounting, and often access to these databases is restricted. Moreover, there could be such situation when the department of one company have no common register. Verifying all document from different databases without making mistakes is impossible. Typical stock exchange transaction could be done for several seconds, without a mediator. However, the process of ownership transfer can take a week. It could be explained by the fact that companies do not have access to the register of each other, that is why they cannot automatically confirm right transfer process.

As it was mentioned earlier, one of the first “mass market” implementation of the blockchain technology was the creation of the “Bitcoin” in 2008. Since that moment, a significant number of articles connected to the theme was published.

Recent researches dig deep into the major idea of blockchain technology and of how it works and changes an ordinary human life.

Our point of view follows the lead of scholars who believe that blockchain has three steps of evolution. The first one is blockchain of Bitcoin, the second one is blockchain of smart contracts, and the third one is blockchain of everything (Swan 2015). The first social Institute, which was mostly influenced by blockchain, is a financial sphere, and the general reason for that is cryptocurrency and what opportunities it catalyzes. The traditional financial instruments and banking business have been rapidly changed under blockchain circumstances. The implementation of blockchain technology is a great competitive advantage today, and all actors of banking and financial sphere intensively use it (Fanning, Centers 2016).

The blockchain technology provides an opportunity to stakeholders all over the world to change the social and economic order and revise the role of intermediaries (notary, financial guarantor, transfer agent, etc.) and other market participants in bureaucratic processes by entering the new era of the distributed ledgers. Intermediaries could be substituted by smart contracts application based on blockchain technology (Shrier 2016).

An increasing amount of publications in the sphere of law and economics signify the expanded role of smart contracts. The latter provide the transfer of information from paper to the digital databases what can transform the document matching and signing from the bulky operation to the high-efficient process.

The smart contracts provide an opportunity to exclude mediators from the operation chain thus it could make lower operational costs (Kosba 2015; Koulu 2016).

There is an enormous amount of blockchain project realizations in financial, banking and business sphere. However, of course, this technology has a high potential for implementation by governments for providing optimization of the bureaucratic process, increasing transparency and accountability of the agent actions.

This research addresses the question of how the blockchain technology could help to resolve principal-agent problems in politics and public sphere and to minimize corruption risks and increase the political trust to political institutions. Blockchain technology working principle contains the answer to this question.

It is necessary to understand that blockchain technology is the new method of data storing which comes to replace the traditional ways of information keeping, for instance, hard disks, flash cards, paper carriers, etc. The general problem of the latter is that information is keeping just in one place. If someone illegally deletes or changes the information, it will have an irreversible effect. For instance, personal medical information in Russia, as a rule, is kept on a physical carrier. All medical information of the person could be stolen by someone who has an administrative resource or just gets access. Even if information is kept with the help of cloud technologies, it is no problem to delete information. In both situations, the citizen is a victim. If we pay attention to the interaction between citizens and other bureaucratic structures, for instance, a person tries to register a small business in Russia, he can meet the situation when his application is lost. As a rule, the person is proposed to pay a bribe to official or initiate a new registration process. All these situations relate to principal-agent problems.

Blockchain technology is a decentralized digital ledger. It means that information is distributed to all members of the system. Such distribution of data makes the system sustainable to unauthorized attempts to change information. Even if someone hacks a computer or another device which is the part of blockchain system and tries to change data, it will be a vain attempt. The system could be hacked and some information changed if only the fifty percent of the computers will be attacked at the same time. Hacker attacks become very expensive and practically impossible.

The Blockchain is successful against manipulation and attacks due to its technical design. It is necessary to describe the key elements of the system for further explanation.

1)Different data changes in the system are called “transactions.” For instance, if real estate cadastre works on blockchain system, then every ownership registration is called “transaction.”

2)Every transaction is recorded into “block” of transactions and every «block» connected with a previous one by chronological rule. The general feature of the block is that it is impossible to delete blocks, or change their chronological position. That is why any information which was downloaded to blockchain could not be deleted. It is possible just make another transaction and block.

3)Consensus is a necessary condition for transaction recording. Consensus could be reached when special nodes so called minors of the system will check the transaction matching with previous information, resolving cryptographical task.

4)Minors get encouragement for cryptographical task resolving (for instance, Bitcoins, or Ether).

5)Every node or member of the system has a unique ID consisting of thirty and more letters and numbers.

There are several types of blockchain technology realizations, which is constructed on various combinations of the principles who can observe blockchain transactions and data, and who can conduct the changes (transactions) in the system.

· Public blockchains could be characterized as such type of blockchain cannot be owned and regulated. Everyone in the world can have access to the system, contribute the data to the system and possess the copy of ledger. Such type of the blockchain is the basis of Bitcoin and other cryptocurrencies. Systems which are built up this way are decentralized.

· Consortium blockchains. This type could be used when it is necessary to limit amount of actors who for instances contribute to the system. Several pre-selected nodes could control consensus in such systems. It gives an opportunity to make an exclusive system where owners can define the game rules, and partially decentralized ledger could save values and characteristics of public blockchains. It ca

· In totally private blockchains the central actor possesses the right to conduct permissions and set up the different rules. This kind of blockchain can be used by single firm or organization for internal processes optimization and costs cutting. (Buterin, 2015)

Another significant aspect which is exceedingly important to highlight is `smart contracts'. The latter is an application which is developed on blockchain platform. The smart contract is a mathematical script that provides an opportunity to make deals without any mediators. The working principle of the smart contract is following: for instance, the side A wants to sell a house, for this purpose smart contract could be made. This contract contains the terms of sale, but in the form of mathematical code. Side A transfers ownership of the house to the smart contract. If the terms of sale are appropriate for the side B then the latter pay “money” to the smart contract and get the ownership. The last step of this process is a transfer of money to the side A by smart contract. As it was mentioned earlier, the foundation of the smart contract is mathematical code; it means that smart contract could be used for different purposes. Another crucial notion is that smart contracts eliminate the necessity in various mediators such as notary, etc.

It could be concluded that there are three general principles of the Blockchain technology:

1)Decentralization;

2)Cryptographical evidence of each transaction;

3)Every person or node has the public “key.”

As it has been mentioned earlier, blockchain technology has appeared on the market in 2008 in Bitcoin. Despite on the fact that blockchain technology has been invented for the rather a long time before Bitcoin, only implementation of public blockchain in an economic sphere attracted attention of the experts and society. Blockchain makes the opportunity to provide the safest and public way of data keeping, reducing costs and eliminating the way to manipulate system. It is main factor which describes blockchain technology as an instrument to increase the trust to political institutions and minimize corruption.

Chapter 4. Blockchain and principal-agent problems

Both moral hazard and adverse selection and even blind trusteeship could occur in the real interaction between citizens and some bureaucratic structures. The citizen often doesn't know the rules that regulate some services, for instance, in what time the service should be provided, and of course, doesn't have the ability to observe the actions of the agent. The process of receiving service in some bureaucratic structure is similar to a black box; a person should just apply for some service and wait for results.

Blockchain technology and smart contracts create circumstances for perfect policing and resolve the problem of asymmetry of information due to the elimination of the agent by smart contracts system. The agent elimination resolves the problems of the agency costs, moral hazard, adverse selection because the reason of these problems is disappeared.

The smart contract system could provide the significant part of services in digital form.

In the case when society needs an agent, blockchain provide principal with instant ability to observe the actions of the agent. It is a solution for one type of information asymmetry problem connected with moral hazard. It makes the monitoring process transparent and convenient. There is no need to use some proxies and surrogates to estimate the effectiveness of agent actions. It also means that monitoring cost could be equal to zero, at the same time bonding cost and residual loss are not influenced. Agency costs in the case when services are provided by smart contracts are equal to zero.

By making political and bureaucratic system more transparent and accountable blockchain directly decreases the risk of corruption occurrence, moreover, if we exclude the human from interaction as in case of smart contracts then we potentially can eliminate corruption at all. That is way the first hypothesis of this research is confirmed.

Blockchain and Trust to political institutions

It is necessary to argue that blockchain implementation could also resolve the problem of distrust to political institutions. Blockchain minimizes corruption and increases effectiveness and transparency of the bureaucratic processes and bureaucracy at all. Even elections as the general democratic institute also could be held using blockchain technology and providing the transparency and accountability of the process. All named factors directly influence the people's lives, improving them. If people lives become better thanks to political institutions, hence confidence of citizens rises.

Cases

As it has been mentioned earlier, there are many cases of blockchain implementation in the non-political sphere, but the governments of several countries such as Estonia, Sweden, Georgia have started blockchain technology implementation in the public sphere either.

All projects with blockchain technology implementation by governments were started not earlier than in 2014. The blockchain is rather new technology, and a sample of cases is explained by the absence of other countries which have launched blockchain projects. Moreover, all countries have comparatively high level of development in spheres where blockchain was implemented, that is why there is a difficulty to fix radical changes which were provided by blockchain implementation.

Blockchain in Georgia

The problem of land titling is a rather common problem for a significant number of countries. Peruvian economist Hernando de Soto coined the term “dead capital” that means that people could possess capital that is not fungible because of legal issues. (De Soto, 2000) “Of the 7.3 billion people in the world, only two billion have a title that is legal and effective and public regarding their control over an asset. … When something is not legally on record as being owned, it can therefore not be used … as collateral to get credit, as a credential that you can be able to transfer part of your property to invite investment in.» (English,2016) There are many countries where people have problem with land titling, for instance, Greece, Honduras, and other developing countries which have ineffective bureaucratic structures, corruption etc. Georgia is not an exception. Such factors as inappropriate documents keeping, administrative and politics issues which are related to the collapse of the Soviet Union and high level of corruption in first years of independence positively influenced the cadastral problems. Many territories were the subject of disputes.

Despite strong negative internal circumstances, government of Georgia has reformed the mechanism of property rights registration. According to the Doing Business Inex, the citizens had to commit eight procedures for property rights registration, and the process took 39 days in 2005. In 2016 the process took one day, and citizens should pass one procedure. These results characterize Georgia is one of leaders in Doing Business rating on property rights registration indicator ( Doing Business Indicator, 2005 - 2016)

The success did not stop government of Georgia, and in partnership with Bitfury agency which specializes on cryptocurrency mining and providing blockchain implementation service, they have announced Bitcoin Blockchain project development, the main purpose of which is blockchain technology integration in property rights registration process. The project has started in February 2017 and now distributed ledger contains approximately 100 000 property rights documents.

The very first steps of land titling reformation in Georgia were made before blockchain implementation and implied attempts to provide effectiveness and transparency in process of interaction between principal and agent. Hence, the blockchain implementation was a logical continuation of this process and was employed as a way to automate the system of information storing and deal settlement. As it was mentioned above, blockchain provides changes the agent by mathematical code. Blockchain technology and smart contracts conduct circumstances for perfect policing and resolve the problem of asymmetry of information due to the elimination of the agent by smart contracts system. The agent elimination resolve the problems of the agency costs, moral hazard, adverse selection. Moreover, once stored, data cannot be deleted or changed providing a transparent picture of all mathematically verified transactions, because the leger is distributed among many computers. Hence, it becomes really difficult to perpetrate illegal actions and easy to control the process.

According to Valery Vavilov, CEO of Bitfury, “The big goal is to move [the process] to smartphones so that people can use it 24/7 and all transactions are secured, transferrable and accountable.” (D'Anconia,2017) It demonstrates that erstwhile complicated processes of land titling and deal settlement could be more efficient and user friendly.

Other perspective spheres for blockchain implementation in Georgia also exist, for instance, governmental and official documents keeping. (Smerkis, 2017) The digitalization of documents in common with their keeping in distributed ledger (Blockchain) is the safest and most effective option that resolve problems of illegal document elimination and unoptimized work with paper carriers. If ten years ago the land titling dispute between two actors could be resolved by corruption methods, today the risk of such solution is dramatically low. Moreover, the blockchain solution could completely neutralize corruption.

Blockchain in Sweden

The similar attempts to implement cadastral reform with blockchain technology took place in Sweden. It was considered that an optimal sphere for a pilot project of blockchain platform integration is real estate and land registration. This choice could be explained by the notion that of the real estate market deserves safe information storage, because actions of some market players could be unscrupulous. The principal-agent problems occur in interaction between, for instance, the person who seek the house for purchasing, and realtor who tries to sell something. The problem of asymmetry of information is significant in this case because agent (realtor) could motivate principal to buy real estate which could be involved in some juridical disputes. This is a result of situation that person who wants to buy a property doesn't have an access to the full database where all data is stored. Blockchain technology and smart contracts implementation conduct circumstances for perfect policing and resolve the problem of asymmetry of information due to the elimination of the agent by smart contracts system.

Firstly, all information about the property could be kept in blockchain. All data in blockchain could not be illegally deleted or changed. Moreover, all members of this system can have an access to the property information. This resolves the asymmetry information problem.

Secondly, the smart contracts technology could be implemented in sell and purchase process of property. This situation eliminates the necessity not only in agent, but also in other mediators, such as notary. In a result principal agent issues could disappeared at all.

The first phase of the project was the preparation, platform developing and testing smart-contract function with some banks. (Rizzo, 2017) The second phase of the project launched in March 2017 and taking place now. The officials of Swedish Land Registry in common with blockchain startup ChromaWay are trying to test blockchain technology and smart contracts in the real condition, but of course with some limitations. (Rizzo, 2017) The third and final phase will be a launch of real estate and land registration processes, information keeping and realization of sale and purchase processes on blockchain platform. (Keane, 2017)

Hence, after all three phases completion Sweden will be able to provide transparent and safe process of real estate and land registration guaranteed by blockchain mechanism. Moreover, in all these processes both the agent and problems connected with his behavior will be eliminated.

Nevertheless, blockchain implementation in cadastral sphere of Sweden has some difficulties due to juridical issues. Sweden laws dictate that dealings in the sphere of real estate should be conducted with physical attributes implementation. The resolving of these issues is needed for blockchain success in Sweden. (Keane, 2017) Taking into account such difficulties, it is relevant to highlight that such issues take place in all countries and modifying laws according to technical improvements in each sphere is normal and may be understood as a common practice.

Blockchain in Estonia

In the process of country development Estonian government have made a bet on IT as the most perspective sphere. Today Estonia is the leader of global digitalization stream. The juridical and bureaucratic structures have been changed and optimized for the wide implementation of new technologies and IT sphere development. All mentioned explains why Estonia was the first country implemented blockchain technology for optimization of bureaucratic processes and information storing. The core element of all Estonian data environment is X-Road system launched in 2001 that provides more government institutions with secure data exchange and stores all National ID cards that enable citizens to use all the services. It is exceedingly important to highlight that the system now based on blockchain have never been down since its beginning. Now citizens of Estonia need their handwritten signatures for marriage and buying real estate only, identity cards made able anybody to vote digitally and it was realized in latest parliamentary elections. One of the projects with blockchain technology implementation was eHealth in 2015. The purpose of this project was to transfer medical data of the citizens into blockchain to (1) increase security of documents and personal information, because no one can illegally change data, (2) provide a convenient instant access to the information, it is useful feature in case of emergency, (3) use own medical information and share it if you need help in another country, etc. ( E-Health, 2016)

Another project is e-Residency. The aim of this project is to provide international companies and foreign citizens with ability to register business in the Estonian jurisdiction. Later PublicNotary representing an electronic form of notary without any mediators was launched. It provides an opportunity to blockchain jurisdiction: there is no need for physical stamps, signatures, etc. (E-Residency,2016)

Estonian bank LHVSBank was one of the first commercial organization which proposes a service to their clients, which is based on blockchain technology. Customers got an opportunity to transfer money all over the world for free.

All spheres in which improvements that have been conducted with blockchain technology implementation by the government of Estonia contained the principal-agent issues. Now Estonians have effective bureaucratic system where problems connected with principal-agent issues, for instance, corruption are minimized and data is stored safely. Moreover, the fact that the elections of the Estonian officials are also based on blockchain technology is a great reputation profit for the government of Estonia. The citizens, understanding blockchain principle, trust to political institutions, because the transparency and accountability which blockchain provides.

There is a remarkable notion of Anna Piperal, Managing Director for the e-Estonia Showroom, said. “We as citizens know what the Estonian government collects about us. Everything is auditable. And institutions and government cannot manipulate the data once it's in the blockchain.” (Forbes, 2016)

Conclusion

The research question of this reach is how blockchain technology implementation can minimize corruption occurrence in the principal-agent model and increase the level of trust to political institutions. The first step of the research was an analysis of the agency theory works by Jensen and Meckling, B. Mitnick, K. Eisenhardt and corruption research. These works formed the main theoretical framework for blockchain technology analysis. The second step was an analysis of blockchain technology, its working principle, literature on this topic and cases of successful implantation of this technology by government.

We found out that blockchain technology implementation could resolve principal-agent issues due to the elimination of agent by smart contracts in one case and providing transparency and accountability of the agent actions. That is why we confirmed our hypothesis 1 that implementation of blockchain technology can contribute to resolving corruption related problems of principal-agent model and minimize the level of corruption connected with interactions between citizens and governmental bureaucratic structures.

The relations between agent and principal are based on contractual foundation. Nevertheless, the agent actions distortion can occur as a result of wish to maximize his utility, ignoring principal interests. As it has been mentioned earlier, there is an asymmetry of information in relations between agent and principal, the latter often doesn't have instruments to observe or estimate agent's actions, and principal is forced to trust to principal. However, agent use such circumstances, in a result corruption occurs, hence the level of trust decreases. Blockchain minimizes and in some cases eliminates principal agent issues, that is why the second hypothesis that Blockchain technology can increase level of public trust in political institutions.is also confirmed.

...