Centralization vs. Decentralization: First Evidence from the Laboratory
The future architecture of financial systems is a subject of contention, with centralized and decentralized governance proponents. Here, we ask the following question. Would the architecture affect the quality of decision making? We propose a game where financial network participants demarcate the ownership of claims to income. This governance task can be decentralized (shared authority), centralized (single authority), or hybrid (alternating authority). Without communication, all architectures supported poor outcomes. With communication, decentralization ensured good governance and maximum profits, whereas centralization did not—lowering communication’s potency in promoting socially optimal decisions. This indicates that there is scope for decentralization in innovating financial institutions. This paper has been accepted by Camelia Kuhnen for the Virtual Special Issue on Digital Finance. Funding: N. Chemaya acknowledges partial financial support from the NET Institute. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2025.02314 .