Don Boudreaux on Insider Trading
Oct 26th, 2009 by Alexandre Padilla
GMU Economics Professor, Don Boudreaux, provides us with a Manneian defense of insider trading in the October 24 edition of the Wall Street Journal.
I wrote my dissertation on insider trading and corporate governance. The literature, theoretical and empirical, on insider trading is just plain huge and with time I came to slightly change my opinion on insider trading. I am not necessarily as convinced as before that insider trading should not be prohibited. True, one can argue that insider trading has benefits (improve informational efficiency of the markets, move capital towards more valuable uses, etc.) but it does have costs such as increasing agency and capital costs and decreasing liquidity. Today, I am not as certain as I was before that the benefits exceed the costs. Actually, I am inclined to think that insider trading costs exceed its benefits. However, it does not mean that the prohibition of insider trading and its enforcement should be left to the government, the Department of Justice, or the SEC. I believe that corporations and stock exchanges should decide whether or not insider trading should be prohibited on their markets AND investors will decide whether or not they wish to invest in these companies or markets that allow insider trading. Ultimately, the competitive process will help firms and markets discover what are the most effective institutional rules that will lead to healthy, broad, and efficient markets.