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Insider Trading as Victimless Crime

Few corporate-governance issues arouse as much indignation in the general press as insider trading. Allowing executives to reap trading profits based on their knowledge of internal corporate developments is widely viewed as grossly unfair-though it is not always clear who is victimized by this unfairness. Sometimes the companies that the insiders work for suffer harm, but other times they welcome the trading. Outside shareholders may envy the profits of inside traders, but proving that they are harmed by the practice is much more difficult. On the whole, the most common grievance against insider trading is simply that it reduces public confidence, and therefore public participation, in the stock market. From the applause that greets each new prosecution of a suspected inside trader-the most recent target being former Defense Department official Paul Thayer-one would hardly guess that the merits of this sort of regulation are being increasingly questioned in academic circles. Insider trading seems to be one of those cases where regulators are moving in the opposite direction from academic opinion.

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