Abstract We investigate the role of strategic security design in the market for retail investment products. Focusing on a dominant yet understudied design feature, we provide evidence consistent with issuers’ strategic increase of product complexity to mitigate price competition. Complexity facilitates product differentiation, thereby impairing investors’ ability to compare products. Because more complex products entail greater markups, imply higher tail risk, and are first-order stochastically dominated by simpler products, the empirically observed rise in market complexity increases uncompensated risk-taking, particularly among less sophisticated investors. Overall, our findings indicate that complexity is shaped by issuers’ deliberate design choice to preserve product rents.

This study investigates the role of asymmetric information for the pricing, issuance volume, and design of innovative securities. By analyzing the information that structured product issuers provide to the investors of those products, we can identify specific sources of asymmetric information between the issuers and investors in this market. We show that issuers exploit this information friction to offer products to investors that appear more profitable for the issuer. In addition, we find that the friction induces issuers to design products with higher information asymmetry. Our results suggest that product issuers’ behavior increases information frictions in the financial system.