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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 New York Times v. Sullivan ,2 the Supreme Court ruled that "a public official cannot recover damages for a defamatory falsehood unless he proves that the statement was made with "actual malice," -- that is "with knowledge that it was false or with reckless disregard of whether it was false or not." 3 It thereby reduced the range of stories for which a newspaper could be found liable. In 1967, the Supreme Court extended this protection to stories about public figures.4 Thus, a negligence-style standard now governs libel suits brought by public officials or public figures.5
The motivation for this paper is to analyze implications for...