Transaction costs and planner intervention. (English) Zbl 1264.91083
The paper studies efficiency issues of a two-period general equilibrium model in which costs are incurred on transactions in financial assets market.
The considered model consists of a finite number of households that trade and consume a finite number of physical commodities and face a finite number of states of uncertainty in the second period. Each household is endowed with a strictly positive quantity of every commodity in each state of uncertainty and in the first period. Since commodities are perishable, households may want to transfer their endowment from period one to period two so as to maximize their preferences (embodied in well-behaved utility functions) over consumption possibilities. However, the transfer of wealth is conducted with help of financial assets and each transaction on the financial asset market is burdened with some cost. The costs of transactions on the financial market are assumed to be strictly convex and nonnegative (and satisfy some additional restrictions).
In this setting, a transaction costs equilibrium is defined as a state in which consumers maximize their utilities, markets clear and the net costs of financial transactions vanish. Further, it is shown that one can introduce a new set of assets accounting both for the asset price and transaction cost and equivalently define equilibrium in terms of the new assets. The new equilibrium type is called \(\beta\)-transaction costs equilibrium and its efficiency properties may be analyzed. It appears that in the presence of transaction costs the equilibrium allocations are all generically Pareto-inefficient (a property is generic if it is satisfied in an open dense set of some parameter space – here, the space of parameters is the set of endowments) which gives space for intervention of a social planner. The planner adjusts transaction costs by scaling them in a way that it keeps the total transaction costs intact – budget balance is preserved – and it allows for Pareto-improvement of the economy.
The main result of the paper (Theorem 4) states that if endowments and utility functions of consumers are parameters of the model and satisfy some suitable assumptions, then for each value of the parameter belonging to an open dense set of the parameter space there exists a planner intervention policy (scaling vector) that it preserves budget balance condition and it enables to move the economy form the suboptimal \(\beta\)-transaction costs equilibrium to a new Pareto-superior equilibrium and the updated equilibrium is regular.
The considered model consists of a finite number of households that trade and consume a finite number of physical commodities and face a finite number of states of uncertainty in the second period. Each household is endowed with a strictly positive quantity of every commodity in each state of uncertainty and in the first period. Since commodities are perishable, households may want to transfer their endowment from period one to period two so as to maximize their preferences (embodied in well-behaved utility functions) over consumption possibilities. However, the transfer of wealth is conducted with help of financial assets and each transaction on the financial asset market is burdened with some cost. The costs of transactions on the financial market are assumed to be strictly convex and nonnegative (and satisfy some additional restrictions).
In this setting, a transaction costs equilibrium is defined as a state in which consumers maximize their utilities, markets clear and the net costs of financial transactions vanish. Further, it is shown that one can introduce a new set of assets accounting both for the asset price and transaction cost and equivalently define equilibrium in terms of the new assets. The new equilibrium type is called \(\beta\)-transaction costs equilibrium and its efficiency properties may be analyzed. It appears that in the presence of transaction costs the equilibrium allocations are all generically Pareto-inefficient (a property is generic if it is satisfied in an open dense set of some parameter space – here, the space of parameters is the set of endowments) which gives space for intervention of a social planner. The planner adjusts transaction costs by scaling them in a way that it keeps the total transaction costs intact – budget balance is preserved – and it allows for Pareto-improvement of the economy.
The main result of the paper (Theorem 4) states that if endowments and utility functions of consumers are parameters of the model and satisfy some suitable assumptions, then for each value of the parameter belonging to an open dense set of the parameter space there exists a planner intervention policy (scaling vector) that it preserves budget balance condition and it enables to move the economy form the suboptimal \(\beta\)-transaction costs equilibrium to a new Pareto-superior equilibrium and the updated equilibrium is regular.
Reviewer: Piotr Mackowiak (Poznań)
Keywords:
Pareto suboptimality; convex transaction costs; regularity; policy intervention; fiscal balanceReferences:
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