Can Decentralized Markets Be More Efficient?

Abstract

Decentralized markets are opaque and prone to trade delays, leading to the perception that they are less efficient than centralized limit order markets. Our model shows, however, that in presence of market power and asymmetric information problems decentralization can promote higher trade efficiency. First, screening behavior may be less aggressive and inefficient in decentralized markets as sellers reach fewer buyers. Second, in asset classes where information is needed to improve allocative efficiency, decentralized markets may dominate as predictable trading interactions and exclusive trading terms encourage information acquisition. Centralized markets, however, dominate when private information merely induces adverse selection.