Strategic Complexity

In this Department of Economics Seminar, Victoria Vanasco, from the Centre de Recerca en Economia Internacional (CREI) discusses her paper on risk adjusted capital allocation and misallocation

In this Seminar, Victoria explores the incentives of product designers to produce complex products, and the resulting implications for overall product quality.

In her model, there is a consumer who can accept or reject a product proposed by a designer, who jointly chooses the quality and the complexity of the product. While the product’s quality determines the direct benefits of the product to the consumer, the product’s complexity primarily affects the information she can extract about the product’s quality.

Examples include banks that design financial products that they later offer to retail investors, or policy makers who propose policies for approval by voters.

She finds that complexity is not necessarily a feature of bad quality products. For example, while an increase in alignment between the consumer and the designer leads to more complex but better quality products, higher demand or lower competition among designers leads to more complex and worse quality products.

Victoria discusses how the findings can rationalize the observed trends in complexity of financial products and of regulation.