In)Efficient Asset Trade And A Rationale For A Financial Transaction Tax

This paper studies how differential borrowing cost can lead to inefficient real investment due to the feedback effect of asset trade. I set up a game theoretic model in which an asset trader has superior information about a firm's investment opportunity. In a bust, asset trade between the informed trader and the uninformed, liquidity constrained traders often yields to an uninformative asset price. The uninformative equilibrium is detrimental to welfare since the firm's investment decision is based on the asset price. The Central Bank adopts a policy which reduces the likelihood of the uninformative equilibrium to occur.