Parallax and Tax
56 Pages Posted: 14 Nov 2018 Last revised: 19 Aug 2019
Date Written: August 15, 2019
Common valuations pose an obstacle to trade and, hence, an existential threat to brokers, who profit from taxing trade. We write down a model in which a broker drives a wedge between valuations by deceiving gullible traders. Separate valuations facilitate arbitrage, and arbitrage generates brokerage fees. We then show that this process, which we call parallax and tax, explains a classic case of market inefficiency: the favorite-longshot bias in horserace parimutuel markets.
Keywords: deception, arbitrage, parallax and tax, favorite-longshot bias
JEL Classification: D22, D82, D83, L83
Suggested Citation: Suggested Citation