Insider Networks

31 Pages Posted: 20 Jun 2018  

Selman Erol

Carnegie Mellon University - David A. Tepper School of Business

Michael Lee

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: May 21, 2018

Abstract

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

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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