Transaction Taxes and Financial Market Equilibrium

Abstract

I explore the effects of trade-size dependent transaction taxes on market liquidity and information acquisition. Transaction taxes cause strategic informed traders to scale back their aggregate trading, which, surprisingly, causes both market liquidity and informed investor profits to decline in the level of the tax. Taxes on trading can reduce rent-seeking behavior when agents engage in a race to obtain private information earlier than others. Such taxes also generally reduce (increase) the proportion of agents acquiring short-term (long-term) information and thus can lead to greater firm values.

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