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Should Speculators be Taxed?

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  • Rohit Rahi
  • James Dow

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.KeyWords: Speculation, Hedging, Transactions Tax, Information Revelation

Suggested Citation

  • Rohit Rahi & James Dow, 1998. "Should Speculators be Taxed?," FMG Discussion Papers dp291, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp291
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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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    3. James Dow, 2003. "Informed Trading, Investment, and Welfare," The Journal of Business, University of Chicago Press, vol. 76(3), pages 439-454, July.
    4. Umlauf, Steven R., 1993. "Transaction taxes and the behavior of the Swedish stock market," Journal of Financial Economics, Elsevier, vol. 33(2), pages 227-240, April.
    5. Myron S. Scholes, 1981. "The economics of hedging and spreading in futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 1(2), pages 265-286, June.
    6. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
    7. José M. Marín & Rohit Rahi, 2000. "Information Revelation and Market Incompleteness," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(3), pages 563-579.
    8. 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.
    9. 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

    Keywords

    speculation; hedging; transactions tax; information revelation;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D60 - Microeconomics - - Welfare Economics - - - General

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