| 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. |