The Tobin Tax - A Game-Theoretical and an Experimental Approach

Abstract:     
In the nineteen-seventies, James Tobin suggested the introduction of a transaction tax on the currency market to cope with exchange rate volatility. In spite of his proposal being discussed frequently and very controversial ever since by economists and policy makers, the so-called Tobin tax has never been imposed on any currency market. We investigate the consequences of the introduction of such a tax on an asset market model from a game-theoretic and an experimental point of view. Our main results include in respect to our model that contrary to the situation in game-theoretic equilibrium, the Tobin tax i) reduces trade volume, ii) reduces volatility, iii) increases market efficiency, and iv) decreases earnings inequality. These effects are likely to disappear if the tax rate is high.

Number of Pages in PDF File: 48

Keywords: Tobin tax, behavioral finance, experiment

JEL Classification: C91, D44, E44, E58, F31, G15

working papers series