Insider Trading Should be Legal

Don Boudreaux of George Mason university had a great article in the Wall Street Journal on Saturday defending insider trading.

“Prohibitions on insider trading prevent the market from adjusting as quickly as possible to changes in the demand for, and supply of, corporate assets. The result is prices that lie.

And when prices lie, market participants are misled into behaving in ways that harm not only themselves but also the economy writ large.

Remember the 1970s-era price ceiling on gasoline? By causing prices at the pump to lie about the scarcity of oil, that price ceiling led Americans to waste untold hours waiting in lines to fuel their cars. Similar wastes occur when corporate assets are mispriced.”

He concludes:

“By allowing companies as they compete for capital to experiment with different ways of dealing with insider trading, we would discover which proscriptions work best for some kinds of firms and which proscriptions work best for other kinds of firms.

Relying upon competition and the self-interest of shareholders and creditors (both actual and potential) to discover which types of information are proprietary–and, hence, protected from insider trading–and which types of information are not proprietary removes politics from this vital task. Importantly, it also replaces the unreliable judgments and “best guesses” of political officials with the much more reliable determinations of competition.”

In his piece, Boudreaux channels the work of another great scholar, former dean of George Mason Law School Henry Manne. Read Manne’s article on why insider trading should be legal here.