Insider networks

Selman Erol and Michael Lee

No 862, Staff Reports from Federal Reserve Bank of New York

Abstract: How do insiders respond to regulatory oversight? History suggests that they form sophisticated networks to share information and circumvent regulation. We develop a theory of the formation and regulation of information transmission networks. We show that agents with sufficiently complex networks bypass any given regulatory environment. In response, regulators employ broad regulatory boundaries to combat gaming, giving rise to regulatory ambiguity. Tighter regulation induces agents to migrate transmission activity from existing social networks to a core-periphery insider network. A small group of agents endogenously arise as intermediaries for the bulk of information. We provide centrality measures that identify intermediaries.

Keywords: network formation; endogenous intermediation; regulatory ambiguity; insider trading (search for similar items in EconPapers)
JEL-codes: D85 G14 G20 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2018-08-01
New Economics Papers: this item is included in nep-cdm, nep-gth, nep-net and nep-reg
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Working Paper: Insider Networks (2020)
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