TRANSACTION TAXES AND FINANCIAL MARKET EQUILIBRIUM

I explore the effects of trade-size dependent transaction taxes on mar ket liquidity and information acquisition. Transaction taxes cause str ategic informed traders to scale back their aggregate trading, which, surprisingly, causes both market liquidity and informed investor profi ts to decline in the level of the tax. Taxes on trading can reduce ren t-seeking behavior when agents engage in a ''race'' to obtain private information earlier than others. Such taxes also generally reduce (inc rease) the proportion of agents acquiring short-term (longterm) inform ation and thus can lead to greater firm values.