The social cost of blackmail

Despite the fact that blackmail constitutes a voluntary transaction between two parties, it is deemed to bea criminal offense in most legal systems. The traditional economic approach to this so-called "paradox of blackmail" emphasizes welfare loss generated by the costly rent-seeking activities of potential blackmailersas the primary justification for its criminalization. This argument, however, does not extend to cases inwhich potentially damaging information about the victim was acquired by the blackmailer at no cost. Italso does not seem to shed light on a related puzzle: why is it legal for a potential victim to bribe theother party with the purpose of achieving the same final outcome (suppression of information) as in thecase of blackmail? This paper addresses these questions in a simple model of bargaining underasymmetric 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 thebargaining power. However, when the blackmailer is a monopolist seller of the information, inefficiencyresults from his demands being too high relative to the social optimum, providing justification for thepractice of penalizing blackmail. On the other hand, when a victim is the monopolist buyer of theinformation, the equilibrium offer is inefficiently low, implying that its punishment would becounterproductive. These arguments provide further support for the claim that under reasonableassumptions the criminalization of blackmail can be justified on efficiency grounds.