Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility.

Access to private information is shown to generate both the incentives and the ability to manipulate asset markets through strategically distorted.announcements. The fact that privileged information is noisy interferes with the public's attempts to learn whether such announcements are honest; it allows opportunistic individuals to manipulate prices repeatedly without ever being fully found out. This leads the authors to extend Joel Sobel's (1985) model of strategic communication to the case of noisy private signals. Their results show that when truthfulness is not easily verifiable, restrictions on trading by insiders may be needed to preserve the integrity of information embodied in prices. Copyright 1992, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.