Economic Theory

, Volume 50, Issue 3, pp 603–634 | Cite as

Transaction costs and planner intervention

Research Article
  • 187 Downloads

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.

Keywords

Constrained suboptimality Convex transaction costs Regularity Policy intervention Anonymity Fiscal balance 

JEL Classification

D53 G11 H21 H23 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Arrow K.J., Hahn F.: Notes on sequence economies, transaction costs, and uncertainty. J Econ Theory 86, 203–218 (1999)CrossRefGoogle Scholar
  2. Cass D., Citanna A.: Pareto improving financial innovation in incomplete markets. Econ Theory 11, 467–494 (1998)CrossRefGoogle Scholar
  3. Citanna A., Kajii A., Villanacci A.: Constrained suboptimality in incomplete markets. Econ Theory 11, 495–521 (1998)CrossRefGoogle Scholar
  4. Citanna A., Polemarchakis H., Tirelli M.: The taxation of trade in assets. J Econ Theory 126, 299–313 (2006)CrossRefGoogle Scholar
  5. Del Mercato E., Villanacci A.: Taxes and money in incomplete financial markets. Dec Econ Fin 29, 23–54 (2006)CrossRefGoogle Scholar
  6. Elul R.: Welfare effects of financial innovation in incomplete markets economies with several consumption goods. J Econ Theory 65, 43–78 (1995)CrossRefGoogle Scholar
  7. Geanakoplos, J., Polemarchakis, H.: Existence, regularity, and constrainted suboptimality of competitive allocations when the asset market is incomplete. In: Heller, W.P., Ross, R.M., Starrett, D.A. (eds.) Uncertainty, Information, and Communication: Essays in Honor of KJ Arrow, vol. 3. Cambridge: Cambridge University Press (1986)Google Scholar
  8. Kajii A.: Anonymity and optimality of competitive equilibria when markets are incomplete. J Econ Theory 64, 115–129 (1994)CrossRefGoogle Scholar
  9. Kubler F.: Notes on Numerical Methods to Solve Non-linear Equations, Mimeo. University of Pennsylvania, Philadelphia (2007)Google Scholar
  10. Laitenberger M.: Existence of financial market equilibria with transaction costs. Ricerche Econ 50, 69–77 (1996)CrossRefGoogle Scholar
  11. Martins-da-Rocha V.F., Vailakis Y.: Financial markets with endogenous transaction costs. Econ Theory 45, 65–97 (2010)CrossRefGoogle Scholar
  12. Villanacci A., Carosi L., Benevieri P., Battinelli A.: Differential Topology and General Equilibrium with Complete and Incomplete Markets. Kluwer, Boston (2002)Google Scholar

Copyright information

© Springer-Verlag 2010

Authors and Affiliations

  1. 1.European University Institute, Max Weber ProgrammeSan Domenico di FiesoleItaly

Personalised recommendations