The following question is the key one :What is considered to be privilege information? No matter the different definitions available , there is one in particular which is quite clear to stress the nature of the privilege : Privilege information is the one which is known by just a few , and it might have an impact on financial markets valuation. In other words, it might help to any of those few potential investor to get higher economic return than it would be otherwise .Thus, the problem arises when such investor are from inside the firm.-
Privilege information includes: future investment plans, financial statement to the public authority, merger approval and the like. In all this cases ,the market value of the firm might go up or down depending upon the nature of such information. For instance, the approval by the executive board for new investment plans, which will impact positively the stock market valuation of such a firm, is the typical example of information shared by a few. Any internal potential investor , would benefit buying before those plans are made public . However, the same opportunity should be available for anyone from the public ,with that information so they can buy stock options and expect its return to be higher in the future. The problem is that it is not always so. The same case apply , whether anyone know the financial results which might show an increase in profit .It is possible to make a profit buying before those results are made public. The ethic dilemma arise because of the gap between those who have the information , and those who do not, or have to wait for it to be public before making their portfolio decisions.
These situations are considered as market failure ,and privilege information is a negative externality , which arise because of the nature of business decision in competitive environment .In this kind of environment, nobody want to give up their privileges of being the first, in favour of their competitor. The social benefit of information is higher than the private benefit, so less information is available and few people have more information for their advantages instead of society ( potential investors).
What is the role of institutional framework?. As long as there are property right concerning information clearly defined; which from the financial market valuation stand point, means that there is a legitimate owner of certain level of key information. Therefore, the issue is to get control of how those owner use that information, without affecting the chance of other investors to benefit also from it, specially if the firm is depending on stock market as a source of financial resources . So, it has been established the black out period, which imply that nobody within those few with access to privilege information, will take advantage of that information .Those who do not fulfil that requirement exposure themselves to heavy fines, usually a proportion of the total transaction. The black out reduce the social benefit of information, because somehow there is no information available for anyone ,therefore nobody can make business transaction with some specific , while the new information is not available yet. As a result, when the information becomes available both private and social benefit are similar ,as long as everyone has the same chance of making profit with it .Another alternative is to increase private benefit arising from information ,making it available on firm ´s web pages as soon as it is useful for market transactions.-
The last question: what about a politician with business interest ,trying to get a higher profit because of its position for getting better information?. In this situation, it is more an ethical problem than a market failure. Therefore, sanctions should be higher .-