Paper #1877

Title:

Centralized vs decentralized markets: The role of connectivity

Authors:

Simone Alfarano, Albert Banal-Estañol, Eva Camacho, Giulia Iori, Burcu Kapar and Rohit Rahi

Date:

January 2024

Abstract:

We consider a setting in which privately informed agents are located in a network and trade a risky asset with other agents with whom they are directly connected. We compare the performance, both theoretically and experimentally, of a complete network (centralized market) to incomplete networks with differing levels of connectivity (decentralized markets). We show that decentralized markets can deliver higher informational efficiency, with prices closer to fundamentals, as well as higher welfare for mean-variance investors.

Keywords:

Networks, heuristic learning, informational efficiency, experimental asset markets

JEL codes:

C92, D82, G14

Area of Research:

Business Economics and Industrial Organization

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