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Centralized vs decentralized markets in the laboratory: The role of connectivity

Simone Alfarano (), Albert Banal-Estanol, Eva Camacho-Cuena, Giulia Iori and Burcu Kapar

MPRA Paper from University Library of Munich, Germany

Abstract: This paper compares the performance of centralized and decentralized markets experimentally. We constrain trading exchanges to happen on an exogenously predetermined network, representing the trading relationships in markets with differing levels of connectivity. Our experimental results show that, despite having lower trading volumes, decentralized markets are not necessarily less efficient. Although information can propagate quicker through highly connected markets, we show that higher connectivity also induces informed traders to trade faster and exploit further their information advantages before the information becomes fully incorporated into prices. This not only reduces market efficiency, but it also increases wealth inequality. We show that, in more connected markets, informed traders trade not only relatively quicker, but also more, in the right direction, despite not doing it at better prices.

Keywords: Experiments; financial markets; diffusion of information; decentralized trading. (search for similar items in EconPapers)
JEL-codes: C92 D82 G14 (search for similar items in EconPapers)
Date: 2020-02
New Economics Papers: this item is included in nep-exp, nep-mst, nep-net and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:99129

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