Optimal taxation in asset markets with adverse selection

Constrained efficiency is characterized in an asset market, subject to search frictions, where sellers are privately informed about the type of their asset. The determines opportunity cost for and quality buyers. constrained-efficient allocation implemented using a sales tax schedule. optimal schedule has single-crossing property, requiring trading low-quality assets be subsidized high-quality taxed. Surprisingly, could non-monotonic or price even when buyers agree on ranking assets. This result implies that linear schedule, as typically assumed literature, significantly limit benefits taxation. role traditional effects higher measure distressed sellers, more efficient matching technology also studied.