Insider Trading : Regulation, Securities Markets, and Welfare Under Risk Aversion

I analyze in this paper the impact of insider trading regulation (ITR) on a securities market and on social welfare. I argue below that the imposition of ITR forces a reallocation of wealth and risk that decreases social welfare. Three reasons explain this result. First, ITR increases the volatility of securities prices, thus making the market more risky; second, it worsens the risk sharing among investors; and, third, it diverts resources from the productive sector of the economy. Further, although I formally establish conditions under which ITR makes society better off, I argue that those conditions cannot be used to justify the imposition of this regulation