Sunday, October 25, 2009

Defending the undefendable: insider trading

Before there was Freakonomics and the Armchair Economist, there was Walter Block Defending the Undefendable. These arguments force students to think instead of simply regurgitating knowledge. 

Don Boudreaux channels Block (and Henry Manne) with his defense of insider trading:
Suppose that unscrupulous management drives Acme Inc. to the verge of bankruptcy. Being unscrupulous, Acme's managers succeed for a time in hiding its perilous financial condition from the public. During this lying time, Acme's share price will be too high. Investors will buy Acme shares at prices that conceal the company's imminent doom. Creditors will extend financing to Acme on terms that do not compensate those creditors for the true risks that they are unknowingly undertaking. Perhaps some of Acme's employees will turn down good job offers at other firms in order to remain at what they are misled to believe is a financially solid Acme Inc.
Insider trading would force the stock price closer to its true value, and prevent all of these mistakes.
...when prices lie, market participants are misled into behaving in ways that harm not only themselves but also the economy writ large.

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