INSIDER TRADING - REGULATION, SECURITIES MARKETS, AND WELFARE UNDER RISK-AVERSION

I analyze in this article the impact of insider trading regulation (IT R) on a securities market and on social welfare, and argue that the im position of ITR forces a reallocation of wealth and risk that decrease s social welfare. Three reasons explain this result: First, ITR increa ses the volatility of securities prices; second, it worsens the risk s haring among investors; and, third it diverts resources from the produ ctive sector of the economy. Further, although I formally establish co nditions under which ITR makes society better off, I argue that those conditions are not useful to justify the imposition of this regulation .