An Economic Analysis of Libel Law
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An Economic Analysis of Libel Law Manoj Dalvia and James F. Refalob a C. W. Post Campus, Long Island University, 720 Northern Blvd., Brookville, NY 11548, USA. E-mail: [email protected] b California State University, 5151 State University Drive, Los Angeles, CA 90032, USA
This paper examines the welfare implications of different libel law standards as applied to newspapers in publishing stories. Our work extends the current literature by permitting private and public incentives to deviate, giving rise to an agency problem, and by formulating a two-stage decision model based on a story’s expected value. We show that the negligence standard provides incentives for the agent to take actions, merely to insure itself against liability. This results in a deadweight loss to society. We also show that both standards can be socially inefficient; however, correction using policy tools under strict liability places a lower informational burden on policy makers, than does the negligence standard. Eastern Economic Journal (2008) 34, 74–94. doi:10.1057/palgrave.eej.9050003 Keywords: agency; welfare; externality; negligence; liability; decision; deadweight loss; subsidy; expected value JEL: D61; D62; D81; K00
INTRODUCTION This paper examines the welfare effects of different libel law standards as applied to the publication of news stories about public figures. Because of public (social) externalities, not all benefits or costs stemming from publication accrue to, or are borne by, the newspaper. As a result of these distortions, the socially optimal solution is unlikely to obtain. The paper models the application of libel law by assuming that the newspaper’s decision to publish is determined by the expected liability (costs) arising from publication of false stories, where its ability to mitigate some of the costs depends on the applicable liability standard. We show that compared with strict liability, the current standard governing libel law — termed ‘‘negligence’’ — leads to greater publication costs for stories that are likely to be true and potentially increased publication of stories that are likely to be false. This result is due to additional liability protection provided by negligence, enabling a newspaper to ‘‘insure’’ against liability. We also show that an implicit agency problem exists between the newspaper and society under both standards, and determine conditions for which the social optimum can be consistently attained under strict liability, when using conventional policy tools. We demonstrate that the negligence standard cannot be adjusted in a similar manner. Finally, we provide other applications for this modeling approach. Prior to 1964, the legal rule governing libel in the United States was a ‘‘strict liability’’ standard, under which a newspaper would be liable for all damages caused to someone’s reputation by any story that was not provably true.1 In its decision of
Manoj Dalvi and James F. Refalo An Economic Analysis of Libel Law
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New York Times v. Sullivan,2 the Supreme Court ruled that ‘‘a public off
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