Insiders. Outsiders, and Market Breakdowns Utpal Bhattacharya University of Iowa Matthew Spiegel Columbia University A simple classical walrasian framework is pro posed for tbe study of manipulation among asym metrically informed risk-averse traders in finan cial markets, and it is used to analyze tbe occurrence ofa market breakdown in toe trading system. Such a phenomenon occurs wben toe out siders refuse to trade with the insiders because toe informational motive for trade of tbe insider out. weighs ber hedging motive. We demonstrate tbe robustness ofour results by proving tbat toe mar. ket collapse condition extends not only to tbe lin ear strategy function, but to tbe wbole class offea sible nonlinear strategy functions. Implications for insider-trading regulation are sketched. This article finds in closed form the entire set of noisy rational expectations equilibria for a model of an xchange economy characterized by asymmetric information and strategic behavior. The model has the following features. There is an informed risk-averse monopolist and a continuum of competitive risk- averse uninformed traders. The basic structure of the model includes strategic behavior by the informed Walrasian price formatie quests to Matthew Spiegel, Columbia University, Graduate School of Busi ness, 414 Uris Hall, New York, NY 10027 The Review of financial Studies 1991 Volume 4, number 2, Pp. 255-284 c 1991 The Review of Financial Studies 0893-9454/91/$1.50