David Bourget (Western Ontario)
David Chalmers (ANU, NYU)
Rafael De Clercq
Jack Alan Reynolds
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We study the eﬀect of transaction costs (e.g., a trading fee or a transaction tax, like the Tobin tax) on the aggregation of private information in ﬁnancial markets. We analyze a ﬁnancial market à la Glosten and Milgrom, in which informed and uninformed traders trade in sequence with a market maker. Traders have to pay a cost in order to trade. We show that, eventually, all informed traders decide not to trade, independently of their private information, i.e., an informational cascade occurs. We replicated our ﬁnancial market in the laboratory. We found that, in the experiment, informational cascades occur when the theory suggests they should. Nevertheless, the ability of the price to aggregate private information is not signiﬁcantly aﬀected. (JEL C92, D8, G14).
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