INVESTMENT AND INSIDER TRADING

We study insider trading in a dynamic setting. Rational, but uninforme d, traders choose between investment projects with different levels of insider trading. Insider trading distorts investment toward assets wi th less private information. However, when investment is sufficiently information elastic, insider trading can be welfare-enhancing because of more informative prices. When insiders repeatedly receive informati on, they trade to reveal it when investment is information elastic bec ause good news increases investment and hence future insider profits. Thus, more information is revealed and uninformed agents are exploited less frequently by insiders. Both effects are Pareto-improving. Final ly, we consider various insider-trading regulations.