Bray Theory Workshop

We study government interventions in a dynamic market with asymmetric information. We show that if the government can only carry out budget-neutral policies, introducing a short tax-exempt trading window followed by short-lived positive taxes creates a Pareto improvement in the market. Under a sufficient condition on the shape of the gains from trade and the distribution of asset values, we show that, even when not requiring budget-neutrality, it is optimal to subsidize trades only at time zero while imposing prohibitively high taxes afterwards. Subsidies can greatly enhance welfare but they can also be detrimental if they are provided with delay.

Paper can be found at:  https://www.dropbox.com/s/wpp306khlu79sn9/Government%20Intervention%20with%20Dynamic%20Lemons%20Resubmitted.pdf