39 Pages Posted: 20 Jun 2018 Last revised: 12 May 2020
Date Written: May 21, 2018
How do insiders respond to regulatory oversight on transmissions? History suggests that they form more sophisticated networks to circumvent regulation. We develop a theory of the formation and regulation of 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. 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 transmissions. We provide centrality measures that identify intermediaries.
Keywords: Network Formation, Insider Trading, Regulatory Ambiguity, Endogenous Intermediation
JEL Classification: D85, G14, G20
Suggested Citation: Suggested Citation