Jingxing (Rowena) Gan

Centralized platforms (e.g., Uber) rely primarily on sales commission (aka, service fees) to generate revenues whereas decentralized blockchain-based startups (e.g., Filecoin) often forego these in favor of token retention. We show that both levers help to overcome moral hazard and incentivize platform building, but they aren’t perfect substitutes and imply a strategic trade-off: the commission approach generally leads to higher long-term profits for the platform founders, whereas token retention can lead to higher service levels, benefiting the service providers and users. Furthermore, the two levers also require different ICO designs when raising capital: commission works best when paired with uncapped ICOs (i.e., unlimited token supply) whereas token retention works best with capped ICOs under certain conditions. These findings offer some guidance and explanations for the operating and ICO design choices of decentralized platforms.

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 (aka, Security Token Offerings, STOs)—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 rm operating strategy. We show that in unregulated environments, ICOs can lead to significant agency costs, underproduction, and loss of rm value. These inefficiencies, however, fade as product margins and demand characteristics (mean/variance) improve, and 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.

Using airlines as a backdrop, we study optimal overbooking policies with endogenous customer demand, i.e., when customers can internalize their expected cost of being “bumped”. We first consider the traditional setting in which compensation for bumped passengers is fixed and booking limits are the airline’s only form of control. We provide sufficient conditions under which demand endogeneity leads to lower overbooking limits in this case. We then consider the broader problem of joint control of ticket price, bumping compensation and booking limit. We show that price and compensation can act as substitutes, which reduces the general problem to a more tractable one-dimensional search for optimal overbooking compensation, and effectively allows the value of flying to be decoupled from the cost of being bumped. Finally, we extend our analysis to the case of auction-based compensation schemes, and demonstrate that these generally outperform fixed compensation schemes. Numerical experiments to gauge magnitudes suggests that fixed-compensation policies that account for demand endogeneity can significantly outperform those that do not, and that auction-based policies bring smaller but significant additional gains.