372. Oren Bar-Gill and Assaf Hamdani, Optimal Liability for Libel, 07/2002; subsequently published by The Berkeley Electronic Press, in Contributions to Economic Analysis & Policy, Vol. 2, Issue 1, Article 6, May 2003.
Abstract: Courts justify the constitutional law of libel with consequential reasoning, yet they fail to arrive at an optimal liability regime. Previous literature, relying on the nature of information as a public good, concurs with the courts about the inadequacies of strict liability, but fails to devise an optimal regime. The present study aims to fill this void, and formally study optimal liability for libel taking into account the unique nature of information. We first demonstrate that a single damage measure for publication of false libelous information cannot simultaneously induce socially optimal decisions regarding both pre-publication verification and publication. We then propose a two-dimensional strict liability rule, which can induce the first-best outcome. Interestingly, the first dimension of the optimal rule, which applies when some positive level of verification is socially desirable, sets the damage award equal to the social benefit from truthful publication.