Blackmail, economic efficiency and libertarianism

Abstract The present paper deals with the economics of blackmail, having assumed – in line with the most recent libertarian scholarship—that certain blackmail exchanges would constitute fraud and would be therefore impermissible. It is for that reason that our economic analysis is narrowed down to permissible (i.e., non-fraudulent) blackmail exchanges. First, we tackle the allocative efficiency of a regime wherein blackmail exchanges would be legal. Here, our argument is Coasean in nature. Given negligible transaction costs and ignoring any external costs and benefits, permitting blackmail would produce private efficiencies and would be under the said assumptions superior to a regime with blackmail banned. However, onḍce we start considering both positive and negative externalities, our simplified models can at most yield an agnostic verdict. That is, we cannot determine purely economically whether delegalizing would, all in all, increase or decrease social welfare . Finally, we argue that permitting blackmail seems to fare, everything else equal, worse than banning it as far as dynamic efficiency is concerned. More specifically, with blackmail being legal, some actors would be incentivized to invest some resources in digging up the information that they might in the end decide not to reveal for money, with discovering the information thus transpiring to be wasteful.