Transaction costs and planner intervention
Title: Transaction costs and planner intervention
Author: HOELLE, Matthew
Citation: Economic Theory, 2012, Vol. 50, No. 3, pp. 603-634.
ISSN: 1432-0479; 0938-2259
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.
First published online : August 2012
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