Insider trading: Regulation, securities markets, and welfare under risk aversion

I analyze in this article the impact of insider trading regulation (ITR) on a securities market and on social welfare, and argue that the imposition of ITR forces a reallocation of wealth and risk that decreases social welfare. Three reasons explain this result: First, ITR increases the volatility of securities prices; second, it worsens the risk sharing among investors; and, third, it diverts resources from the productive sector of the economy. Further, although I formally establish conditions under which ITR makes society better off, I argue that those conditions are not useful to justify the imposition of this regulation.