Insider trading: regulation, securities markets, and welfare under risk neutrality

Abstract

I evaluate in this paper the impact of insider trading regulation (ITR) on a securities market and on social welfare. I show that ITR has both beneficial and detrimental effects on a securities market. In terms of welfare, I show that ITR has a purely redistributive effect; that is, it generates trading gains and trading losses that cancel out at the aggregate level. However, the goods and services that could have been produced with the resources allocated to enforce such a wealth redistribution are a net social cost of restricting insider trading. Finally, although I establish two conditions under which ITR is beneficial, I argue that neither condition provides sufficient support to the imposition of such a regulation.