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When is public enforcement of insider trading regulations effective?

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  • Wielhouwer, Jacco L.

Abstract

In this paper we investigate when public enforcement of insider trading regulations reduces the amount of insider trading. We model a game between a potentially self-interested regulator enforcing insider trading laws and a trader who may be trading on inside information. We show that equilibrium strategies exist where despite active enforcement all inside information is used. Furthermore, we find that increased disclosure in order to reduce the amount of inside information does not necessarily lead to less insider trading as insiders may more frequently use their information. Increased disclosure decreases the contribution of public enforcement to reducing insider trading. We also show that improvements in the risk analysis system used by the regulator for monitoring purposes may prompt more insider trading. The results yield policy implications, contribute to explaining empirical observations, and suggest possible directions for future empirical research into the relationship between enforcement and the cost of equity.

Suggested Citation

  • Wielhouwer, Jacco L., 2013. "When is public enforcement of insider trading regulations effective?," International Review of Law and Economics, Elsevier, vol. 34(C), pages 52-60.
    • Handle: RePEc:eee:irlaec:v:34:y:2013:i:c:p:52-60
    DOI: 10.1016/j.irle.2012.12.001
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    More about this item

    Keywords

    Insider trading; Regulation; Game theory; Enforcement; Cost of equity;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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