Implications of financial transaction costs on the real economy: A note

Abstract

This note studies the influence of a financial transaction tax and transaction costs on the optimal production and hedging strategies of a duopoly. Firms are exposed to demand uncertainty that leads to price risk and can hedge their risk exposure on a forward market. However, the forward position is subject to transaction costs. We investigate two settings: first, we explore the Cournot duopoly with a simultaneous hedging opportunity; second, we analyze the case with a sequential forward market. We show that in both settings transaction costs lead to a less competitive market and that prices increase as the producers limit their output.