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The Social Cost of Blackmail

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Abstract

Despite the fact that blackmail constitutes a voluntary transaction between two parties, it is deemed to be a criminal offence in most legal systems. Traditional economic approach to this so-called ‘paradox of blackmail’ emphasizes welfare loss generated by the costly rentseeking activities of potential blackmailers as the primary justification for its criminalization. This argument however does not extend to cases in which potentially damaging information about the victim was acquired by the blackmailer at no cost. It also does not seem to shed light on a related puzzle: why is it legal for a potential victim to bribe the other party with the purpose of achieving the same final outcome (suppression of information) as in the case of blackmail? This paper addresses these questions in a simple model of bargaining under asymmetric information which is used as a unified framework for studying both blackmail and bribery. Under asymmetric information the bargaining outcome is not efficient regardless of the distribution of the bargaining power. However, when the blackmailer is the monopolist seller of the information inefficiency results from his demands being too high relative to the social optimum, providing justification for the practice of penalizing blackmail. On the other hand, when a victim is the monopolist buyer of the information the equilibrium offer is inefficiently low implying that its punishment would be counterproductive. These arguments provide further support for the claim that under reasonable assumptions criminalization of blackmail can be justified on efficiency grounds.

Suggested Citation

  • Oleg Yerokhin, 2011. "The Social Cost of Blackmail," Economics Working Papers wp11-15, School of Economics, University of Wollongong, NSW, Australia.
  • Handle: RePEc:uow:depec1:wp11-15
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    File URL: http://www.uow.edu.au/content/groups/public/@web/@commerce/@econ/documents/doc/uow103922.pdf
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    References listed on IDEAS

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    1. Drew Fudenberg & David K. Levine & Jean Tirole, 1987. "Incomplete Information Bargaining with Outside Opportunities," The Quarterly Journal of Economics, Oxford University Press, vol. 102(1), pages 37-50.
    2. Gomez, Fernando & Ganuza, Juan-Jose, 2002. "Civil and criminal sanctions against blackmail: an economic analysis," International Review of Law and Economics, Elsevier, vol. 21(4), pages 475-498, May.
    3. Daughety, Andrew F. & Reinganum, Jennifer F., 1994. "Settlement negotiations with two-sided asymmetric information: Model duality, information distribution, and efficiency," International Review of Law and Economics, Elsevier, vol. 14(3), pages 283-298, September.
    4. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
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    Keywords

    blackmail; bribery; bargaining;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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