An Efficiency Argument for Balanced Transaction Costs

14 Pages Posted: 18 Aug 2005

Date Written: April 12, 2005

Abstract

Transaction costs are usually thought to be a major source of inefficiency because they do not allow efficient trades to take place. One might think that lowering transaction costs is always welfare-improving. This paper argues that, in contrast to conventional wisdom, it may be beneficial to increase transaction costs on one side of the market to balance them with the costs on the other side. In the model, transaction costs imposed on applicants serve as a screening device that substantially reduces evaluation costs. Even when application costs are totally wasteful, they arise endogenously in the equilibrium and can result in a welfare improvement.

Keywords: Transaction costs, Application Fees, Matching, Two-Sided Markets, Search Costs

JEL Classification: C78, D83, D43

Suggested Citation

Arbatskaya, Maria, An Efficiency Argument for Balanced Transaction Costs (April 12, 2005). Available at SSRN: https://ssrn.com/abstract=782340 or http://dx.doi.org/10.2139/ssrn.782340
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