Equilibrium with transaction costs

I will discuss the existence of a Radner equilibrium in a model with proportional transaction costs and the effects of transaction costs on the endogenously-derived interest rates. Two agents receive exogenous, unspanned... [ view full abstract ]

I will discuss the existence of a Radner equilibrium in a model with proportional transaction costs and the effects of transaction costs on the endogenously-derived interest rates. Two agents receive exogenous, unspanned income and choose between consumption and investing into an annuity. The model provides an explicit formula for the equilibrium interest rate in terms of the transaction cost parameter.  In equilibrium, welfare always decreases while the interest rate can be both increasing and decreasing in the transaction cost parameter.