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.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Arrow K.J., Hahn F.: Notes on sequence economies, transaction costs, and uncertainty. J Econ Theory 86, 203–218 (1999)
Cass D., Citanna A.: Pareto improving financial innovation in incomplete markets. Econ Theory 11, 467–494 (1998)
Citanna A., Kajii A., Villanacci A.: Constrained suboptimality in incomplete markets. Econ Theory 11, 495–521 (1998)
Citanna A., Polemarchakis H., Tirelli M.: The taxation of trade in assets. J Econ Theory 126, 299–313 (2006)
Del Mercato E., Villanacci A.: Taxes and money in incomplete financial markets. Dec Econ Fin 29, 23–54 (2006)
Elul R.: Welfare effects of financial innovation in incomplete markets economies with several consumption goods. J Econ Theory 65, 43–78 (1995)
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)
Kajii A.: Anonymity and optimality of competitive equilibria when markets are incomplete. J Econ Theory 64, 115–129 (1994)
Kubler F.: Notes on Numerical Methods to Solve Non-linear Equations, Mimeo. University of Pennsylvania, Philadelphia (2007)
Laitenberger M.: Existence of financial market equilibria with transaction costs. Ricerche Econ 50, 69–77 (1996)
Martins-da-Rocha V.F., Vailakis Y.: Financial markets with endogenous transaction costs. Econ Theory 45, 65–97 (2010)
Villanacci A., Carosi L., Benevieri P., Battinelli A.: Differential Topology and General Equilibrium with Complete and Incomplete Markets. Kluwer, Boston (2002)
Author information
Authors and Affiliations
Corresponding author
Additional information
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.
Rights and permissions
About this article
Cite this article
Hoelle, M. Transaction costs and planner intervention. Econ Theory 50, 603–634 (2012). https://doi.org/10.1007/s00199-010-0583-5
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00199-010-0583-5
Keywords
- Constrained suboptimality
- Convex transaction costs
- Regularity
- Policy intervention
- Anonymity
- Fiscal balance