Tuesday, September 13, 2011

Why is blackmail costly?

Blackmail is a strange concept. Threatening to reveal information is legal. Asking money for a service is legal. But doing both at the same time is illegal. Even stranger, when the transaction is initiated by the one who could be harmed by the revelation, this is technically a bribery, it is legal. So why this difference? The conventional answer is that blackmail is about rent-seeking. But if the damaging information is freely available, there is no welfare loss justifying the criminalization of blackmail.

Oleg Yerokhin claims the justification can lie within the bargaining power structure between the two parties. Indeed, when the information holder is a monopolist, he will have more power than socially optimal, and should thus be punished to internalize this cost. But when the target is a monopolist, then the outcome reverses, and the blackmailer should be subsidized rather than punished. Yet, I hardly find this argument convincing on the grounds that blackmailers are certainly less likely to be monopolists than victims. Indeed, information is duplication at zero or close to zero cost, making it difficult for a monopoly to arise in such a situation. But this information can easily be about one particular person only.

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