Staff Reports
Insider Networks
Number 862
August 2018 Revised May 2019

JEL classification: D85, G14, G20

Authors: Selman Erol and Michael Junho Lee

How do insiders respond to regulatory oversight? History suggests that they form sophisticated networks to share information and circumvent regulation. We develop a theory of the formation and regulation of information transmission networks. We show that agents with sufficiently complex networks bypass any given regulatory environment. In response, regulators employ broad regulatory boundaries to combat gaming, giving rise to regulatory ambiguity. Tighter regulation induces agents to migrate transmission activity from existing social networks to a core-periphery insider network. A small group of agents endogenously arise as intermediaries for the bulk of information. We provide centrality measures that identify intermediaries.

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AUTHOR DISCLOSURE STATEMENT(S)
Selman Erol
I declare that I have no relevant or material financial interests that relate to the research described in the paper titled "Insider Networks." Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Michael Junho Lee
I declare that I have no relevant or material financial interests that relate to the research described in the paper titled "Insider Networks." Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.