Game Theory & Math Economics: Christian C. Opp (University of Pennsylvania) - "Can Decentralized Markets be More Efficient?" (joint work with Vincent Glode)

Sun, 22/05/201616:00-17:00
Elath Hall, 2nd floor, Feldman Building, Edmond J. Safra Campus
Decentralized markets are often characterized as opaque and prone to trade delays, leading to the perception that they are less efficient  than standard centralized limit order markets. We show that in the presence of information  asymmetries decentralized markets can promote higher trade efficiency  than centralized limit order markets through at least two channels. First, screening behavior may be more aggressive and ineffi- cient in centralized markets as sellers face multiple  competing buyers simultaneously.  Second, when these buyers compete among themselves for the asset, they have lower incentives to acquire information about common and private valuations for the asset. In asset classes where information acquisition is required to improve allocative efficiency, decentralized markets may thus dominate as predictable trading interactions and exclusive trading terms encourage information acquisition. The opposite is, however, true when private information merely induces adverse selection. (JEL D82, G23, L10)