Fungibility

Having identified contracts as the nexus of corruption, I sought to find how contracts, blockchain smart contracts, and financial regulations can be used to make them both secure, accountable, transparent, and inclusive. Then I explored how corruption in a contractual relationship could be mitigated, using the term Minimum Hybrid Contract (MHC) which I coined, where a smart contract is a supplement to a legal contract providing transparency and immutability to the contract’s financial transactions, privacy is accepted as a human need and total transparency must be avoided.

The extensive literature review on blockchain explains its key features for financial transaction; transparency and immutability. Blockchain smart contracts can interplay with, or replace legal contract, and mitigate agency theory issues which increases trust in the principal-agent relationship. The MHC is an evolutionary change proposition to ensure stability because it leaves the legal contract as it provides a smart contract as a supplemental transactional tool.

To implement the MHC architecture in a legislation cryptocurrencies are required for the blockchain smart contract to work. Because there is regulatory uncertainty around cryptocurrencies whereas they are illegal in several countries, regulatory strategies such as sandboxes and safe harbors giving regulatory slack and closer collaboration with innovators to ensure financial stability while searching for the optimal regulation is an elaboration on the design of the MHC.

Key agency theory issues are be mitigated significantly when blockchain smart contract’s transparent, open, and immutable properties are leveraged in financial transactions. Information sharing increases when using blockchain because a receipt for a financial transactions is indistinguishable from the transaction itself, thus the MHC provides a deterrent against financial crime by removing the opportunity of conducting receipt fraud. Moreover, the MHC mitigates moral hazard because auditing the immutable and transparent blockchain-based transactions does not require trust in the auditor because the process can be automated by automatically reading data from the blockchain smart contract. Thus agency costs are also reduced as the monitoring costs of financial transactions are reduced, and blockchain smart contracts replace auditors.

Background: In planning for universal health coverage, many countries have been examining their fiscal decentralization policies with the goal of increasing efficiency and equity via “additionalities.” The concept of “additionality,” when the government  of  a  lower  administrative  level  increases  the  funding  allocated  to  a  particular  issue  when  extra  funds  are  present,  is  often  used  in  these  contexts.  Although  the  definition  of  “additionality”  can  be  used  more  broadly,  for  the  purposes of this paper we focus narrowly on the additional allocation of primary healthcare expenditures. This paper explores  this  idea  by  examining  the  impact  of  central  level  primary  healthcare  expenditure,  on  individual  state  level  contributions to primary healthcare expenditure within 16 Indian states between 2005 and 2013. Methods:  In  examining  5  main  variables,  we  compared  differences  between  government  expenditures,  contributions,  and revenues for Empowered Action Group  (EAG) states, and non-EAG states. EAG states are normally larger states that have weaker public health infrastructure and hence qualify for additional funding. Finally, using a model that captured the quantity of central level primary healthcare expenditure distributions to these states, we measured its impact on each state’s own contributions to primary healthcare spending.Results:  Our  results  show  that,  at  the  state  level,  growth  in  per  capita  central  level  primary  healthcare  expenditure  has  increased  by  110%  from  2005-2013,  while  state’s  own  contributions  to  primary  healthcare  expenditure  per  capita  increased  by  32%.  Further  analyses  show  that  a  1%  change  disbursement  from  the  central  level  leads  to  a  -0.132%,  although  not  significant,  change  by  states  in  their  own  expenditure.  The  effect  for  wealthier  states  is  -0.151%  and  significant  and  for  poorer  states  the  effect  is  smaller  at  -0.096%  and  not  significant.  Conclusion: This analysis suggests that increases in central level primary healthcare expenditure to states have an inverse relationship  with  primary  healthcare  expenditures  by  the  state  level.  Furthermore,  this  effect  is  more  pronounced  in  wealthier Indian states. This finding has policy implications on India’s decision to increase block grants to states in place of targeted program expenditures.