Parallax and Tax

54 Pages Posted: 14 Nov 2018 Last revised: 15 May 2019

See all articles by Etan Green

Etan Green

Wharton - Operations, Information and Decisions

Haksoo Lee

Stanford Law School

David M. Rothschild

Microsoft Research - NYC

Date Written: May 13, 2019

Abstract

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. Deception facilitates 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

Green, Etan and Lee, Haksoo and Rothschild, David M., Parallax and Tax (May 13, 2019). Available at SSRN: https://ssrn.com/abstract=3271248 or http://dx.doi.org/10.2139/ssrn.3271248

Etan Green (Contact Author)

Wharton - Operations, Information and Decisions ( email )

Philadelphia, PA 19104
United States

Haksoo Lee

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States

David M. Rothschild

Microsoft Research - NYC ( email )

641 6th Ave., 7th Floor
New York, NY 10011
United States

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