Research Article

Economic Theory

, Volume 50, Issue 3, pp 603-634

First online:

Transaction costs and planner intervention

  • Matthew HoelleAffiliated withEuropean University Institute, Max Weber Programme Email author 

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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.


Constrained suboptimality Convex transaction costs Regularity Policy intervention Anonymity Fiscal balance

JEL Classification

D53 G11 H21 H23