Fee Recovery Fallacy

There is a theory that miners gain financial advantage over other miners by mining their own transactions and "recovering" their own fees.

The theory ignores the opportunity cost of mining block space without collecting payment for it. Payment of a fee to one's self is a financial non-event. Failure to collect a fee is a real cost in the amount forgone, as the cost of mining that portion of the block is uncompensated. The result is a lower return on capital relative to miners who actually sell their block space. Given the zero sum nature of mining this disparity allows the more rational miners to increase their hash power by reinvesting the higher return on capital.

A higher volume of transactions competing for confirmation implies an increase in the average fee level. This affects all miners equally, however a fee level increase only produces more competition, not an increased rate of return on capital. If anything, all miners suffer from the reduced utility caused by the increased demand and therefore fee level (which has been financed in full by the uncompensated miner). In other words the consequence is the opposite of that proposed, and the theory is therefore invalid.

There is a related theory that fee estimation tools may be fooled into recommending higher fees than are required. As shown in Side Fee Fallacy this implies a relationship between historical and future fee rates that does not exist, and that all fees are visible on chain, which is not the case.