24 Pages Posted:
Date Written: May 21, 2018
This paper develops a model to study the formation and regulation of information networks. We analyze a cat and mouse game between a regulator, who sets and enforces a regulatory environment, and agents, who form networks to disseminate and share insider information. For any given regulatory environment, agents adapt by forming networks that are sufficiently complex to circumvent prosecution by regulators. We show that regulatory ambiguity arises as an equilibrium phenomenon – regulators deliberately set broad legal boundaries in order to avoid explicit gaming by agents. As a response, we show that agents form a core-periphery network, with core members acting as conduits of information on behalf of their stakeholders, effectively intermediating all transmissions of information within the network.
Keywords: Network Formation, Insider Trading, Regulatory Ambiguity, Information Intermediation
JEL Classification: D85, G14, G20
Suggested Citation: Suggested Citation