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Exchange Design and Welfare

Author

Listed:
  • Marzena Rostek

    (University of Wisconsin-Madison)

  • Ji Hee Yoon

    (University of Wisconsin - Madison)

Abstract

This paper introduces a model of decentralized markets in which a trader’s demand for each asset is contingent on the price of that asset alone rather than on the price of all assets he trades in other exchanges. Derivatives are generally nonredundant. We characterize the scope for introducing nonredundant derivatives that do and no not replicate the payoffs of the existing assets. With suitable security design, markets with uncontingent demand schedules give rise to weakly larger welfare than markets with contingent schedules, given the set of traders and underlying assets. Introduction of too many derivatives may lower welfare.

Suggested Citation

  • Marzena Rostek & Ji Hee Yoon, 2018. "Exchange Design and Welfare," 2018 Meeting Papers 374, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:374
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