The Economics of Badmouthing: Defamation, Racketeering and the French Financial Press Before World War I

Abstract: Reputation, a source of rents, cannot be conveniently insured. Anybody with a brand or public name must be concerned with the costs of badmouthing and can be ready to give up revenue to prevent circulation and propagation of false and damaging information. As a result, badmouthing is an instrument of racket and the press is likely to be used as a tool of extortion. This paper applies this argument in the context of the market for financial information in France during the period 1880-1914 focusing on the incidence of weak property rights arising partly from soft legal restrictions. Using empirical evidence on the industrial organization of the press and on a major badmouthing racket, we provide two main results. First we show that disinformation and racketeering do happen in specific segments of the market for news and in special situations only. This is owing to the emergence of organizational solutions to deal with rumors. We show that rackets occurred in smaller and less reputable journals, what we call “bad” or “zombie” journals which were – in the extreme cases - called or recalled to life only to wage a press campaign. Second a natural consequence of the existence of threats of badmouthing directs a flow of income towards good journals because the best insurance against bad mouthing by bad journals consists in paying for good mouthing by good journals. This conclusion may contribute to solve the puzzle of why rating managed to charge borrowers for their services.