Insider Networks

40 Pages Posted: 20 Jun 2018 Last revised: 6 May 2019

See all articles by Selman Erol

Selman Erol

Carnegie Mellon University - David A. Tepper School of Business

Michael Lee

Federal Reserve Banks - Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: May 21, 2018

Abstract

How do insiders respond to regulatory oversight? History suggests that they form sophisticated networks to share information and circumvent regulation. We develop a theory of the formation and regulation of information transmission networks. We show that agents with sufficiently complex networks bypass any given regulatory environment. In response, regulators employ broad regulatory boundaries to combat gaming, giving rise to regulatory ambiguity. Tighter regulation induces agents to migrate transmission activity from existing social networks to a core-periphery insider network. A small group of agents endogenously arise as intermediaries for the bulk of information. We provide centrality measures that identify intermediaries.

Keywords: Network Formation, Insider Trading, Regulatory Ambiguity, Endogenous Intermediation

JEL Classification: D85, G14, G20

Suggested Citation

Erol, Selman and Lee, Michael, Insider Networks (May 21, 2018). Available at SSRN: https://ssrn.com/abstract=3182707 or http://dx.doi.org/10.2139/ssrn.3182707

Selman Erol (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Michael Lee

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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