Insider Trading, Investment and Liquidity: A Welfare Analysis

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Abstract
We compare competitive equilibrium outcomes with and without trading by a privately informed ¶monopolistic¶ insider, in a model with real investment portfolio choices ex ante, and noise trading generated by aggregate uncertainty regarding other agents intertemporal consumption preferences. The welfare implications of insider trading for the ex ante expected utilities of outsiders are analysed. The role of interim information revelation due to insider trading, in improving the risk-sharing among outsiders with stochastic liquidity needs, is examined in detail.
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