Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/71213
Authors: 
Dupont, Dominique Y.
Lee, Gabriel S.
Year of Publication: 
2003
Series/Report no.: 
Reihe Ökonomie / Economics Series, Institut für Höhere Studien (IHS) 132
Abstract: 
This paper investigates the effects of transaction taxes on depth and bid-ask spread under asymmetric information. The paper uses a static model where a monopolistic market maker faces liquidity and informed traders. Introducing transaction taxes could, surprisingly, lead to increase in depth. Under some distributional assumptions, when market conditions are favorable to the dealer, the spread responds less than proportionally to an increase in the transaction tax while the depth actually increases. In contrast, when market conditions are unfavorable to the dealer, the spread widens more than proportionally and the depth decreases, potentially to zero, in response to an increase in the transaction tax. Our model sheds light on the disagreement in the empirical literature on the relative magnitude of transaction costs on trading volume.
Subjects: 
asymmetric information
securities transaction taxes
liquidity
JEL: 
G14
D82
Document Type: 
Working Paper

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