Innovation in Decentralized Markets: Technology versus Synthetic Products
American Economic Journal: Microeconomics
vol. 16,
no. 1, February 2024
(pp. 63-109)
Abstract
Advances in market-clearing technology for multiple assets and synthetic products present alternative ways to leverage complementarities and substitutabilities in asset payoffs. This paper compares their equilibrium and welfare effects. In competitive markets, either instrument can mimic the efficient design. When traders have price impact, however, synthetic products and market-clearing technology provide separate instruments for impacting markets' performance and can generate synergies or trade-offs. Neither instrument can generally reproduce the other's payoffs state by state. Moreover, innovation in market clearing renders additional synthetic products nonredundant. Our analysis points to the advantages of each type of innovation while also exposing potential risks.Citation
Rostek, Marzena, and Ji Hee Yoon. 2024. "Innovation in Decentralized Markets: Technology versus Synthetic Products." American Economic Journal: Microeconomics, 16 (1): 63-109. DOI: 10.1257/mic.20220138Additional Materials
JEL Classification
- D44 Auctions
- D47 Market Design
- G11 Portfolio Choice; Investment Decisions
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- G13 Contingent Pricing; Futures Pricing; option pricing
- O31 Innovation and Invention: Processes and Incentives
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