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Transaction costs and planner intervention

  • Matthew Hoelle


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. Copyright Springer-Verlag 2012

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Article provided by Springer & Society for the Advancement of Economic Theory (SAET) in its journal Economic Theory.

Volume (Year): 50 (2012)
Issue (Month): 3 (August)
Pages: 603-634

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Handle: RePEc:spr:joecth:v:50:y:2012:i:3:p:603-634
DOI: 10.1007/s00199-010-0583-5
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  1. Kajii Atsushi, 1994. "Anonymity and Optimality of Competitive Equilibria when Markets Are Incomplete," Journal of Economic Theory, Elsevier, vol. 64(1), pages 115-129, October.
  2. CITANNA, Alessandro & POLEMARCHAKIS, Herakles M. & TIRELLI, Mario, 2001. "The taxation of trades in assets," CORE Discussion Papers 2001017, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. 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.
  4. Elena Mercato & Antonio Villanacci, 2006. "Taxes and money in incomplete financial markets," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 29(1), pages 23-54, 05.
  5. 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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