Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/210714 
Year of Publication: 
2018
Series/Report no.: 
Staff Report No. 862
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
This paper develops a model to study the formation and regulation of information transmission networks. We analyze a cat and mouse game between a regulator, who sets and enforces a regulatory environment, and agents, who form networks to disseminate and share insider information. For any given regulatory environment, agents adapt by forming networks that are sufficiently complex to circumvent prosecution by regulators. We show that regulatory ambiguity arises as an equilibrium phenomenon - regulators deliberately set broad regulatory boundaries in order to avoid explicit gaming by agents. As a response, we show that agents form a core-periphery network, with core members acting as conduits of information on behalf of their stakeholders, effectively intermediating all transmissions of information within the network.
Subjects: 
network formation
insider trading
regulatory ambiguity
endogenous intermediation
JEL: 
D85
G14
G20
Document Type: 
Working Paper

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