Insider Trading Regulation: The Path Dependent Choice between Property Rights and Securities Fraud
70 Pages Posted: 10 Feb 1999
Date Written: December 8, 1998
This article argues that the colloquial understanding of path dependence offers a heuristically powerful metaphor for grappling with the problem of regulating insider trading. The metaphor focuses attention on the proper issues-how did the law arrive at its present form, what paths are available for the future, which of those paths are feasible, and what costs would be entailed in choosing one of the various feasible alternatives over the others. A pragmatic answer to those questions begins with the recognition that insider trading is more closely akin to the class of problems dealt with by state corporate law than that dealt with by federal securities law. The article argues the law has gone too far down the federal regulatory path to turn back, however. Settled expectations and interests of both the regulators and the regulated, institutional competence, the status quo bias, and comparative advantages all argue for preserving the prohibition as a species of federal common law. The article therefore proposes a legal regime that is sensitive to the competing policy and doctrinal concerns that pervade this area of the law, while also taking into account the path dependent nature of the present prohibition.
The article then turns to an analysis of the Supreme Court's recent decision in United States v. O'Hagan, 117 S. Ct. 2199 (1998), arguing that the court failed to grapple with the very serious doctrinal and policy issues presented to it. In developing that argument, the article also contends that O'Hagan sheds light on interpretation of Supreme Court opinions in technical statutory areas. Because the justices are subject to bounded rationality, and their incentive system does not reward developing institutional expertise in such areas, the court is generally not competent to address such issues. As a result, the court appears to defer to specialists in the field. Although deference to expert opinion is a rational response to the conditions under which the justices must operate, such deference may lead the court astray when the experts to whom they defer are also parties to an adversary proceeding before the court, as was the case in O'Hagan. Although further research will be necessary to fully develop this theory of Supreme Court decision making, the present analysis is highly suggestive and, in conjunction with the path dependence metaphor, provides an important aid for understanding the Supreme Court's insider jurisprudence.
JEL Classification: K22, G38, K42
Suggested Citation: Suggested Citation