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Should Speculators be Taxed?

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Author Info
Dow, J.
Rahi, R.

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Abstract

A number of economists have supported the taxation of speculation in financial markets. We examine the welfare economics of such a tax in a model of trading in a financial market where some agents have superiror information. We show that in some cases a tax on speculators may actually increase speculative profits. This occurs if the speculators' benefit from less informative prices offsets the cocts of the tax. The effect on the welfare of other agents depends on how revelation of information changes risk-sharing opportunities in the market. It is possible for the introduction of a tax to cause a Pareto improvement.

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Publisher Info
Paper provided by European University Institute in its series Economics Working Papers with number eco97/21.

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Length: 18 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:eui:euiwps:eco97/21

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Related research
Keywords: INFORMATION ; REGULATION ; SOCIAL WELFARE;

Other versions of this item:

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D60 - Microeconomics - - Welfare Economics - - - General

Cited by:
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  1. Alexander Gümbel, 2000. "Myopic Traders, Efficiency and Taxation," OFRC Working Papers Series 2000fe05, Oxford Financial Research Centre. [Downloadable!]
  2. James Dow & Gary Gorton, 2006. "Noise Traders," NBER Working Papers 12256, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Foucault, Thierry & Themar, David & Sraer, David, 2008. "Individual investors and volatility," Les Cahiers de Recherche 899, HEC Paris. [Downloadable!]
    Other versions:
  4. Alexander Gümbel, 2005. "Should short-term speculators be taxed, or subsidised?," Annals of Finance, Springer, vol. 1(3), pages 327-348, 08. [Downloadable!] (restricted)
  5. Dupont, Dominique Y. & Lee, Gabriel S., 2003. "Effects of Securities Transaction Taxes on Depth and Bid-Ask Spread," Economics Series 132, Institute for Advanced Studies. [Downloadable!]
    Other versions:
  6. Alexander Gümbel & Oren Sussman, 2001. "Optimal exchange-rates: a market-microstructure approach," OFRC Working Papers Series 2001fe13, Oxford Financial Research Centre. [Downloadable!]
  7. Giovanni Cespa, 2000. "Short-term Investment and Equilibrium Multiplicity," Economics Working Papers 520, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2002. [Downloadable!]
    Other versions:
  8. Michael Hanke & Jürgen Huber & Michael Kirchler & Matthias Sutter, 2007. "The economic consequences of a Tobin tax - An experimental analysis," Working Papers 2007-18, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
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