The design and evolution of markets
Combining both theoretical and empirical analyses of specific markets, MADEM (Market design and the evolution of markets) developed new models of markets and new methods to map theory to data and vice versa. The project was based on the premise that markets don't appear out of nowhere but are created, that their rules evolve according to their environments and that participants learn to use them. Researchers analysed three distinct sets of markets: financial markets for derivatives, carbon markets and allocation markets without financial transfers. The new data collected was analysed in combination to new theoretical models tailored to each specific setting, resulting in insights into the functioning of these markets. The first line of research dealt with the competition that exists between financial markets, and more specifically the reasons why the same assets are traded in different venues, although traders value liquidity. While existing explanations focus on trading decisions, the project investigated exchange membership decisions, which happen prior to trading decisions, and identified geographical and regulatory barriers as one of the importance drivers of market coexistence for the same assets. This research contributes to a better understanding of the impacts and limits of competition between financial exchanges at a time of simultaneous entry and consolidation in this industry. MADEM also exploited recent data from the first phase of the EU trading emissions scheme (ETS) to understand how the chosen market design impacted its development and performance. The data permitted visualising the actual market structure that had emerged motivated the development of a new model of price formation in the EU ETS that captures the salient features of emissions markets and allows for the analysis of how design can improve information aggregation. Lastly, the MADEM team also examined markets where there is no price to balance supply and demand, and where instead other rules are used to allocate goods. Course allocation and school choice were the two prime motivating examples. For the course allocation problem, the project identified a new link between fairness and efficiency and a new allocation mechanism that outperforms the best solution proposed so far, called “serial dictatorship.” Nine articles have been or are in the process of being published, while two articles in conference proceedings, four working papers and four other papers are being prepared. The project funded, fully or partially, four postdoctoral students and six doctoral students. Finally, it resulted in the creation of a research network, fostering research on matching for education markets and its dissemination.
Keywords
Economic outcomes, MADEM, market design, financial markets, competition, prices
