Optimal Contracting and Insider Trading Restrictions

Paul E Fischer

Journal of Finance, 1992, vol. 47, issue 2, 673-94

Abstract: Restrictions on trading by insider agents are analyzed using an optimal contracting framework. Prohibition of insider trading is shown to be Pareto preferred if, and only if, a revelation or moral hazard problem exists. If prohibition of insider trading is valuable, then trade registration with a delay is shown to be as valuable as a complete prohibition. Short-selling restrictions, however, are generally of less value than complete prohibition. Finally, regulation of insider agent trading by governmental institutions and/or professional associations is discussed. Copyright 1992 by American Finance Association.

Date: 1992
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