Myopic Traders, Efficiency and Taxation

41 Pages Posted: 4 Oct 2000

See all articles by Alexander Guembel

Alexander Guembel

Toulouse School of Economics, University of Toulouse Capitole

Abstract

This paper explores the welfare implications of a securities transaction tax when informed traders act under short-term objectives. The model presented features speculators who can trade on information of differing time horizons, trade by fully rational uninformed agents, endogenous asset prices and profit maximising firms that can use information contained in stock prices to improve their investment decision. The only value enhancing investment available to firms requires a long-term investment. Therefore investment efficiency can only be improved if stock prices contain long-term information. It is shown that when informed traders act under short-term objectives, a subsidy on short-term trade can improve welfare. This is because trade by short-term informed speculators exerts a positive externality over the profitability of long-term informed trade. A subsidy on short-term trade thus increases the amount of trade on long-term information in equilibrium. As a result stock prices contain more long-term information, which improves investment efficiency. For some parameter values, the cost of paying a subsidy is less than the resulting increase in firm value, while no trader is made worse off by the subsidy. The model takes full account of the effect of a tax on market liquidity and welfare for all market participants.

Keywords: Investment efficiency, short-termism, securities transaction tax, liquidity, welfare

JEL Classification: G14, G18, D60, D82

Suggested Citation

Guembel, Alexander, Myopic Traders, Efficiency and Taxation. EFA 0703. Available at SSRN: https://ssrn.com/abstract=240457 or http://dx.doi.org/10.2139/ssrn.240457

Alexander Guembel (Contact Author)

Toulouse School of Economics, University of Toulouse Capitole ( email )

Manufacture des Tabacs
21, allee de Brienne
Toulouse, 31000
France

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