, Volume 50, Issue 3, pp 603-634
Date: 10 Nov 2010

Transaction costs and planner intervention

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Abstract

In this paper, I examine a two-period general equilibrium model in which transaction costs are incurred whenever financial contracts are traded. These transaction costs are real and convex. The presence of these transaction costs results in a Pareto inefficient equilibrium allocation. Attempting to fix this problem, the planner will intervene by scaling the transaction costs either up or down. The intervention must satisfy fiscal balance meaning that the summed value of transaction costs will remain constant. I prove that over a generic subset of household utility functions and endowments and subject to an upper bound on the number of household types, there exists an open set of planner interventions that lead to a Pareto superior allocation.

The author wishes to thank Simon Scheuring, Benjamin Jonen, Kristoph Steikert, Antonio Penta, and especially Felix Kubler for helpful discussion, to acknowledge the feedback provided by the anonymous referees that greatly improved this work, and to credit T. Holly for inspiring the research on this topic. The author acknowledges the support received from both a Max Weber Fellowship and the University of Zurich. This manuscript is a revised version of a chapter from the author’s dissertation submitted to the University of Pennsylvania.