Innovation in Decentralized Markets: Technology versus Synthetic Products

Marzena Rostek and Ji Hee Yoon

American Economic Journal: Microeconomics, 2024, vol. 16, issue 1, 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.

JEL-codes: D44 D47 G11 G12 G13 O31 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1257/mic.20220138

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