Working Paper: CEPR ID: DP17039
Authors: Simon Jantschgi; Heinrich H. Nax; Bary Pradelski; Marek Pycia
Abstract: Transaction costs are ubiquitous in markets. We show that they can fundamentally alter incentives and welfare. We categorize transaction costs into two types. Uniform transaction costs—such as fixed and price fees—incur unavoidable dead-weight loss but preserve key asymptotic properties of markets without transaction cost. Discriminatory transaction costs—such as spread fees—can avoid dead-weight loss but asymptotically lead to complex strategic behavior that may result in market failure. We show how optimal design depends on market size and traders’ beliefs: uniform fees are often optimal in large markets, while discriminatory fees may be preferable in small markets.
Keywords: Double Auction; Transaction Costs; Incentives; Efficiency; Robustness
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| homogeneous transaction costs (F12) | market behavior (D40) |
| homogeneous transaction costs (F12) | market efficiency (G14) |
| heterogeneous transaction costs (F12) | complex strategic behaviors (L29) |
| complex strategic behaviors (L29) | market failures (D52) |
| heterogeneous transaction costs (F12) | market efficiency (G14) |
| transaction costs (D23) | market behavior (D40) |
| transaction costs (D23) | market efficiency (G14) |