Obfuscation through Complexity: Evidence from the Market for Retail Financial Products

Abstract

This paper examines obfuscation through complexity of financial innovations in the presence of investor learning. By exploiting the staggered adoption of a price disclosure policy for issuers of retail structured products, I provide evidence that issuers subject to price disclosure significantly increase the complexity of their products over time. I show that an increase in complexity significantly reduces the price elasticity of demand. This finding raises the concern that complexity induces social welfare cost. Market competition further intensifies the obfuscation activities of issuers. Overall, the results suggest that policies that target investor learning can yield adverse effects.

Keywords: structured products, complexity, obfuscation, demand elasticities

JEL Classification: D12, G24, G28, L15