Why is blackmail illegal?  Sure it’s mean and all but what  makes it a crime?  This article raises some questions about the legal scholarship behind blackmail. (The background is the Letterman case.)

Whether or not this is how Hollywood really works, Shargel does have a point of logic. The reasoning that makes blackmail illegal–and a great many other similar business activities not illegal — is something that’s never been satisfactorily explained by legal scholars. It remains a paradox of the law. That said, Halderman and Shargel shouldn’t hold their breath until January, when a judge will rule on their motion to dismiss. Even if it makes no sense, blackmail remains a serious crime.

What about the economics of blackmail?  There is one obvious economic rationale for making blackmail a crime: rent-seeking.  Seeking out and producing incriminating evidence for the express purpose of ultimately keeping it secret is a waste of labor resources and should be discouraged.  And this idea explains an otherwise puzzling asymmetry.  That is, presumably I can legally accept payment in return for publicizing good information about you. That is tantamount to threatening not to publicize it if you don’t pay me.  Whether I threaten withold good information about you or actively publicize bad information about you I am arguably doing the same thing:  threatening to lower your reputation relative to what it would otherwise be.

The economic difference is that allowing blackmail leads to unproductive rent-seeking whereas allowing me to charge you for good publicity incentivizes productive information-gathering.

In rare cases blackmail is efficient.  If I want you to dig up the dirt on me (perhaps to keep it out of more dangerous hands) we have an incentive problem.  I can’t pay you up front because then you have no incentive to do the search.  You will come back claiming that my record is so clean that despite all your efforts you came up empty-handed.  Instead I would like to pay you ex post in return for the documents.  But once you’ve already sunk the cost of searching, I will hold you up and try to renegotiate the fee.  The information is not worth anything to you since blackmail is illegal. We would both prefer to allow you to blackmail me ex post.  That way I am effectively commited to pay you for your service and you will work hard.

You can trust me to pay you for the information but now the problem is that I can’t trust you.  You will show me only half of what you found and blackmail me to keep that a secret.  Once you have your money you will show me the other half and blackmail me again. Forseeing this I won’t pay you the first time.

Once you think of this its hard to see how blackmail works at all and why we need to even make it illegal.  The blackmailer has to somehow prove that he is not hiding any additional information.  That is probably impossible because any incriminating evidence can be copied.

Maybe the problem can be solved with a reciprocal arrangement.  You dig up some dirt on me and yourself. Then you offer me the following deal.  I pay you the hush money and you hand over the information about you.  I will pay you because in return I get a threat against you which deters you from blackmailing me again.

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