Working Paper

The Taxation of Bilateral Trade with Endogenous Information

Tri Vi Dang, Florian Morath
CESifo, Munich, 2015

CESifo Working Paper No. 5157

This paper analyzes the effects of taxation on information acquisition and bilateral trade in decentralized markets. We show that a profit tax and a transaction tax have opposite implications for equilibrium outcome in bargaining. A marginal increase of a transaction tax increases the incentive to produce private information which creates adverse selection and reduces the probability of trade. In contrast, a marginal increase of a profit tax reduces the incentive to produce information and increases the probability of trade. In markets where there are gains from trade and private information acquisition creates endogenous lemons problems a profit tax dominates a transaction tax.

CESifo Category
Public Finance
Keywords: bargaining, information acquisition, taxation, financial transaction tax, funding markets
JEL Classification: C780, D820, D830, G180, H200