Monopolistic security design in finance economies

The purpose of this paper is to analyze endogenous asset innovation by an e ntrepreneurial exchange owner in a general equilibrium model of incomplete security markets with financial transaction fees. A monopolistic market mak er has the technology to introduce a new option into the economy and charge investors proportional transaction fees if they trade on the exchange. The market maker's objective is to choose the security and transaction fee tha t maximize revenues when opening the exchange. A computational analysis of this problem is necessary since there are no interesting models with closed -form solutions. We compute the price and welfare effects of the option int roduction.