Nope, what would happen is that everyone without inside information would simply not trade in that security. You would not have a stock market because only people that know the company very well would dare buy stock in it. The cost of capital for companies would skyrocket and the US economy would tank.
It is amusing to me how when all these amateur game theorists create these hypotheticals to prove that insider trading is good, they always assume that there is an endless supply of chumps with an endless supply of money willing to take the opposite end of the trade. Well, let me tell you, people are not that stupid. Especially people with money.
Back in the dark ages, most people with money felt the best place to keep them was locked in a chest in the deepest room in a large castle. There was very little investment, and the dark ages were a time of extreme poverty. It is only through a long series of laws and institutions developed over couple of hundred of years, that we have reached this point of mobility of capital, which allows capital to go where it is most useful, and greatly benefits the economy. But if we remove investor protections things can slide back very easily and very quickly.
That question almost reads like a criticism, but I'd like to throw my hat into the ring here and say I'd like to know how markets cope in this situation. Do we have real world examples?
Lots of real world examples. Eg Japan and Germany still have lighter regulations on insider trading, and in the US and UK people used to trade before insider trading was banned.
Insider trading probably ought to be thought about when designing regulations---but I am not convinced either way that it should be banned.
Sorry, too busy to do the research now. But people did trade before such regulations. And even today, eg Japan and Germany have notably lighter regulations on insider trading.
Both Germany and Japan ban insider trading. It is debatable whether their regulations are lighter and whether their regulations are sufficiently lighter to make a difference.
It is amusing to me how when all these amateur game theorists create these hypotheticals to prove that insider trading is good, they always assume that there is an endless supply of chumps with an endless supply of money willing to take the opposite end of the trade. Well, let me tell you, people are not that stupid. Especially people with money.
Back in the dark ages, most people with money felt the best place to keep them was locked in a chest in the deepest room in a large castle. There was very little investment, and the dark ages were a time of extreme poverty. It is only through a long series of laws and institutions developed over couple of hundred of years, that we have reached this point of mobility of capital, which allows capital to go where it is most useful, and greatly benefits the economy. But if we remove investor protections things can slide back very easily and very quickly.