A game theory model of regulatory response to insider trading
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This is an Author's Original Manuscript of an article published by Taylor & Francis in Applied Economics Letters on 30/06/2016 available online at <a href="http://www.tandfonline.com/10.1080/13504851.2016.1200179">http://www.tandfonline.com/10.1080/13504851.2016.1200179</a>
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We develop a model which can help in explaining the evolving regulatory regime around insider trading. We form a simple sequential game-theoretical model of insider trading transactions and, utilizing Monte Carlo simulation to determine equilibrium, we show that costly investigations and low penalties incentivize traders to engage in illegal transactions. While the model helps to explain stiffer action by regulatory bodies, the question remains as to whether the elevated penalty levels are sufficient to prevent further insider trading.
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