Economic Theory

, Volume 18, Issue 1, pp 37–72 | Cite as

Monopolistic security design in finance economies

  • Karl Schmedders
Symposium Articles


The purpose of this paper is to analyze endogenous asset innovation by an entrepreneurial exchange owner in a general equilibrium model of incomplete security markets with financial transaction fees. A monopolistic market maker has the technology to introduce a new option into the economy and charge investors proportional transaction fees if they trade on the exchange. The market maker's objective is to choose the security and transaction fee that maximize revenues when opening the exchange. A computational analysis of this problem is necessary since there are no interesting models with closed-form solutions. We compute the price and welfare effects of the option introduction.

Keywords and Phrases: Incomplete markets, Option introduction, Price effects, Welfare effects. 
JEL Classification Numbers: C63, D52, G11, G12. 


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Copyright information

© Springer-Verlag Berlin Heidelberg 2001

Authors and Affiliations

  • Karl Schmedders
    • 1
  1. 1.Kellogg Graduate School of Management, Northwestern University, KGSM-MEDS 5th floor, 2001 Sheridan Rd, Evanston, IL 60208, USA (e-mail: US

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