Using a strategic rational expectations equilibrium framework, we show that forcing a well-informed insider to disclose her trades in advance tends to increase welfare for both the insider and less-informed outsiders. Advance disclosure generates price risk for the insider, and to mitigate this risk, the insider trades less aggressively on her private information. Consequently, outsiders face lower adverse selection costs, which improves risk sharing and increases welfare. The drop in trading aggressiveness also causes market efficiency to decline. Furthermore, pretrade disclosure encourages excessive risk taking but may either encourage or discourage managerial effort.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics