The Law and Economics of Insider Trading 2.0

Forthcoming in Encyclopedia of Law and Economics (2nd edition 2020)

UCLA School of Law, Law-Econ Research Paper No. 19-01

51 Pages Posted: 9 Jan 2019

See all articles by Stephen M. Bainbridge

Stephen M. Bainbridge

University of California, Los Angeles (UCLA) - School of Law

Abstract

Insider trading is one of the most controversial aspects of securities regulation, even among the law and economics community. One set of scholars favors deregulation of insider trading, allowing corporations to set their own insider trading policies by contract. Another set of law and economics scholars, in contrast, contends that the property right to inside information should be assigned to the corporation and not subject to contractual reassignment. Deregulatory arguments are typically premised on the claims that insider trading promotes market efficiency or that assigning the property right to inside information to managers is an efficient compensation scheme. Public choice analysis is also a staple of the deregulatory literature, arguing that the insider trading prohibition benefits market professionals and managers rather than investors. The argument in favor of regulating insider trading traditionally was based on fairness issues, which predictably have had little traction in the law and economics community. Instead, the economic argument in favor of mandatory insider trading prohibitions has typically rested on some variant of the economics of property rights in information. This is a chapter from the forthcoming Encyclopedia of Law and Economics (2nd edition 2020).

Keywords: Insider trading

JEL Classification: K22, G30, G38

Suggested Citation

Bainbridge, Stephen Mark, The Law and Economics of Insider Trading 2.0. Forthcoming in Encyclopedia of Law and Economics (2nd edition 2020); UCLA School of Law, Law-Econ Research Paper No. 19-01. Available at SSRN: https://ssrn.com/abstract=3312406

Stephen Mark Bainbridge (Contact Author)

University of California, Los Angeles (UCLA) - School of Law ( email )

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