The Taxation of Bilateral Trade with Endogenous Information
39 Pages Posted: 27 Jan 2015
Date Written: January 26, 2015
This paper analyzes the effects of taxation on information acquisition and bilateral trade in decentralized markets. We show that a profit tax and a transaction tax have opposite implications for equilibrium outcome in bargaining. A marginal increase of a transaction tax increases the incentive to produce private information which creates adverse selection and reduces the probability of trade. In contrast, a marginal increase of a profit tax reduces the incentive to produce information and increases the probability of trade. In markets where there are gains from trade and private information acquisition creates endogenous lemons problems a profit tax dominates a transaction tax.
Keywords: bargaining, information acquisition, taxation, financial transaction tax, funding markets
JEL Classification: C780, D820, D830, G180, H200
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