An Economic Analysis of Libel Law

Abstract

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 places under strict liability places a lower informational burden on policy makers, than does the negligence standard.

Keywords: Agency, Welfare, Externality, Negligence, Liability, Decision, Deadweight Loss, Subsidy, Expected Value

JEL Classification: D61, D62, D81, K00