Toward an Economic Theory of Defamation, Liability, and the Press

Abstract

A number of papers have appeared in recent years which examine the issue of legal liability from an economic perspective.' The emphasis in many of these studies is on evaluating the efficiency of alternative liability rules. One area that has received very little attention is that dealing with legal liability in cases of defamation (libel and slander) by the press. This paper is an attempt to fill this void.2 We first examine the liability rules that are actually used in cases involving defamation by the press. We then develop a model of a profit-maximizing firm which publishes a newspaper. Using this model, we analyze the way in which the firm reacts to changes in liability rules imposed on it. We then examine the relationship between liability rules and social welfare. A profit-maximizing newspaper, regardless of the rule of will not operate in such a fashion as to maximize social welfare. What is of interest is the second-best solution. The second-best solution, and the liability rule that must be imposed in order to achieve this solution, are derived. The optimal liability rule, which we call relaxed liability, is different from any of the rules currently being applied in cases of defamation by the press. Indeed, it is different from any