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Should speculators be taxed?

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  • Dow, James
  • Rahi, Rohit

Abstract

A number of economists have supported the taxation of speculation in financial markets. We examine the welfare economics of such a tax in a model of trading in a financial market where some agents have superior information. We show that in some cases a tax on speculators may actually increase speculative profits. This occurs if the speculators' benefit from less informative prices offsets the costs of the tax. The effect on the welfare of other agents depends on how revelation of information changes risk-sharing opportunities in the market. It is possible for the introduction of a tax to cause a Pareto improvement.

Suggested Citation

  • Dow, James & Rahi, Rohit, 1998. "Should speculators be taxed?," LSE Research Online Documents on Economics 119150, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119150
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    File URL: http://eprints.lse.ac.uk/119150/
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    References listed on IDEAS

    as
    1. Jean-Charles Rochet & Jean-Luc Vila, 1994. "Insider Trading without Normality," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(1), pages 131-152.
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    6. Spiegel, Matthew & Subrahmanyam, Avanidhar, 1992. "Informed Speculation and Hedging in a Noncompetitive Securities Market," The Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 307-329.
    7. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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