Professor Stephen Diamond has published Insider Trading: A Clash between Law and Economics in Oxford Research Encyclopedia of Economics and Finance (Oxford University Press 2020). Professor Diamond’s chapter surveys the evolution of the legal concept of insider trading, summarizes the debate about insider trading among legal and economics scholars, and, finally, explores new frontiers for research on insider trading. Diamond notes that regulation of insider trading seeks to address a classic “lemons problem” in which information asymmetry threatens to “undermine the integrity of the [securities] market, causing potential buyers to discount prices they are willing to pay and, in turn, causing sellers of high-quality goods (in this case, securities) to withdraw.” Diamond goes on to consider the law and economics arguments that challenge the current breadth of regulation of insider trading, with special attention to those arguments rooted in the notion that the right to trade on insider information is “a property right that a firm should be able to allocate in order to maximize overall value of the enterprise.” Diamond concludes that the arguments raised by critics of insider trading regulation have serious limitations yet should be taken seriously: “In doing so, we help highlight areas where theory is under-developed and empirical research is needed to grasp the significance of a fairness/integrity-based alternative argument for regulatory intervention.”
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