Does Blockchain Facilitate Responsible Sourcing? An Application to the Diamond Supply Chain

Blockchain technology has become widely accepted to demonstrate the provenance of physical goods, but there are open questions about its practical implementation and overall effect on ethical sourcing. In the diamond industry, blockchain enables credibility of the certificate of origin and therefore, allows to charge a premium for responsibly produced goods. Thus, one would expect blockchain to be the enabler of responsible sourcing. Using a stylized economic model, we demonstrate that, counter-intuitively, blockchain implementation may reduce incentives for customers to resell diamonds on the secondary markets and increase the cost of market segmentation. As a result, blockchain implementation could change a retailer's market segmentation strategy by increasing incentives to source from non-responsible suppliers. We also demonstrate that to reduce unintended consequences of blockchain implementation, the social planner should offer blockchain as an option (and not as a requirement) to a retailer. This work shows that caution is needed with wide-scale blockchain implementation. Although it is commonly recognized that blockchain's major application is in enhancing the traceability of durable goods or goods that should have a responsible supplier, we show that, in contrast, when factors of durability and responsibility come together, blockchain may negatively influence the responsibility level.