An Efficiency Argument for Balanced Transaction Costs
14 Pages Posted: 18 Aug 2005
Date Written: April 12, 2005
Abstract
Transaction costs are usually thought to be a major source of inefficiency because they do not allow efficient trades to take place. One might think that lowering transaction costs is always welfare-improving. This paper argues that, in contrast to conventional wisdom, it may be beneficial to increase transaction costs on one side of the market to balance them with the costs on the other side. In the model, transaction costs imposed on applicants serve as a screening device that substantially reduces evaluation costs. Even when application costs are totally wasteful, they arise endogenously in the equilibrium and can result in a welfare improvement.
Keywords: Transaction costs, Application Fees, Matching, Two-Sided Markets, Search Costs
JEL Classification: C78, D83, D43
Suggested Citation: Suggested Citation
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