Implications of Financial Transaction Costs on the Real Economy: A Note

Contemporary Economics, Vol. 8, No. 1, pp. 113-118, 2014

6 Pages Posted: 11 May 2014

See all articles by Matthias Pelster

Matthias Pelster

University of Duisburg-Essen - Mercator School of Management; european center for financial services (ecfs)

Date Written: March 31, 2014

Abstract

This note studies the influence of a financial transaction tax and transaction costs on the optimal production and hedging strategies of a duopoly. Firms are exposed to demand uncertainty that leads to price risk and can hedge their risk exposure on a forward market. However, the forward position is subject to transaction costs. We investigate two settings: first, we explore the Cournot duopoly with a simultaneous hedging opportunity; second, we analyze the case with a sequential forward market. We show that in both settings transaction costs lead to a less competitive market and that prices increase as the producers limit their output.

Keywords: price risk, hedging, transaction cost, financial transaction tax, duopoly

JEL Classification: D21, D43, F10, F11

Suggested Citation

Pelster, Matthias, Implications of Financial Transaction Costs on the Real Economy: A Note (March 31, 2014). Contemporary Economics, Vol. 8, No. 1, pp. 113-118, 2014 , Available at SSRN: https://ssrn.com/abstract=2435148

Matthias Pelster (Contact Author)

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany

european center for financial services (ecfs) ( email )

Lotharstraße 65
Duisburg, 47057
Germany

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