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Endogenous Transaction Costs

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  • Martins-da-Rocha, Victor Filipe
  • Vailakis, Yiannis

Abstract

The paper proposes an alternative general equilibrium formulation of financial asset economies with transactions costs. Transaction costs emerge endogenously at equilibrium and reflect agents decisions of intermediating financial activities at the expense of providing labor services. An equilibrium is shown to exist in the case of real asset structures.

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Bibliographic Info

Paper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 680.

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Date of creation: 28 Oct 2008
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Handle: RePEc:fgv:epgewp:680

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References

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  1. Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2001. "Asset Prices and Trading Volume Under Fixed Transactions Costs," NBER Working Papers 8311, National Bureau of Economic Research, Inc.
  2. Arrow, Kenneth J. & Hahn, Frank, 1999. "Notes on Sequence Economies, Transaction Costs, and Uncertainty," Journal of Economic Theory, Elsevier, vol. 86(2), pages 203-218, June.
  3. Repullo, Rafael, 1987. "The Existence of Equilibrium without Free Disposal in," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 275-90, June.
  4. Markeprand, Tobias, 2008. "On financial equilibrium with intermediation costs," Journal of Mathematical Economics, Elsevier, vol. 44(2), pages 148-156, January.
  5. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  6. Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 842-62, August.
  7. Herings,P. Jean-Jacques & Schmedders,Karl, 2000. "Computing Equilibria in Finance Economies with Incomplete Markets and Transaction Costs," Research Memorandum 049, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  8. Hahn, F H, 1971. "Equilibrium with Transaction Costs," Econometrica, Econometric Society, vol. 39(3), pages 417-39, May.
  9. Duffie, Darrell & Shafer, Wayne, 1985. "Equilibrium in incomplete markets: I : A basic model of generic existence," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 285-300, June.
  10. Duffie, Darrell & Sun, Tong-sheng, 1990. "Transactions costs and portfolio choice in a discrete-continuous-time setting," Journal of Economic Dynamics and Control, Elsevier, vol. 14(1), pages 35-51, February.
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  12. Prechac, Christophe, 1996. "Existence of equilibrium in incomplete markets with intermediation costs," Journal of Mathematical Economics, Elsevier, vol. 25(3), pages 373-380.
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  15. Subrahmanyam, Avanidhar, 1998. "Transaction Taxes and Financial Market Equilibrium," The Journal of Business, University of Chicago Press, vol. 71(1), pages 81-118, January.
  16. Frank Milne & Edwin Neave, 2003. "A General Equilibrium Financial Asset Economy with Transaction Costs and Trading Constraints," Working Papers 1082, Queen's University, Department of Economics.
  17. Xing Jin & Frank Milne, 1996. "The Existence of Equilibrium in a Financial Market with Transaction Costs," Working Papers 934, Queen's University, Department of Economics.
  18. Véronique Genre & Daphne Momferatou & Gilles Mourre, 2005. "Wage diversity in the euro area - an overview of labour cost differentials across industries," Occasional Paper Series 24, European Central Bank.
  19. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
  20. Magill, Michael J. P. & Constantinides, George M., 1976. "Portfolio selection with transactions costs," Journal of Economic Theory, Elsevier, vol. 13(2), pages 245-263, October.
  21. Polemarchakis, H. M. & Ku, Bon-Il, 1990. "Options and equilibrium," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 107-112.
  22. Kurz, Mordecai, 1974. "Arrow-Debreu Equilibrium of an Exchange Economy with Transaction Cost," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 699-717, October.
  23. Michael Magill & Martine Quinzii, 2002. "Theory of Incomplete Markets, Volume 1," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262632543, December.
  24. De Bandt, Olivier & Davis, E. Philip, 2000. "Competition, contestability and market structure in European banking sectors on the eve of EMU," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 1045-1066, June.
  25. Bisin, Alberto, 1998. "General Equilibrium with Endogenously Incomplete Financial Markets," Journal of Economic Theory, Elsevier, vol. 82(1), pages 19-45, September.
  26. S. Rao Aiyagari, 1993. "Explaining financial market facts: the importance of incomplete markets and transaction costs," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 17-31.
  27. Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-87, June.
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  29. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
  30. Bergstrom, Theodore C., 1976. "How to discard `free disposability' - at no cost," Journal of Mathematical Economics, Elsevier, vol. 3(2), pages 131-134, July.
  31. Jones, Charles M & Seguin, Paul J, 1997. "Transaction Costs and Price Volatility: Evidence from Commission Deregulation," American Economic Review, American Economic Association, vol. 87(4), pages 728-37, September.
  32. Busch, Lutz-Alexander & Govindan, Srihari, 2004. "Robust nonexistence of equilibrium with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 40(6), pages 641-645, September.
  33. Kurz, Mordecai, 1974. "Equilibrium in a Finite Sequence of Markets with Transaction Cost," Econometrica, Econometric Society, vol. 42(1), pages 1-20, January.
  34. Laitenberger, Marta, 1996. "Existence of financial market equilibria with transaction costs," Ricerche Economiche, Elsevier, vol. 50(1), pages 69-77, March.
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Citations

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Cited by:
  1. Charles Nolan & Alex Trew, 2011. "Transaction Costs and Institutions," CDMA Working Paper Series 201103, Centre for Dynamic Macroeconomic Analysis.
  2. S. Gruber & L. Marattin, 2009. "Taxation, Infrastructure, and Endogenous Trade Costs in New Economic Geography," Working Papers 668, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Stephen Redding, 2009. "Economic Geography: A Review of the Theoretical and Empirical Literature," CEP Discussion Papers dp0904, Centre for Economic Performance, LSE.
  4. V. Martins-da-Rocha & Yiannis Vailakis, 2010. "Financial markets with endogenous transaction costs," Economic Theory, Springer, vol. 45(1), pages 65-97, October.
  5. Olaf Jonkeren & Erhan Demirel & Jos van Ommeren & Piet Rietveld, 2008. "Endogenous Transport Prices and Trade Imbalances," Tinbergen Institute Discussion Papers 08-088/3, Tinbergen Institute.

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