The paper builds on a recent development in libertarian scholarship. In 2024, the philosopher Łukasz Dominiak offered a partial solution to the notorious paradox of blackmail, the long-standing puzzle of why it is legal to gossip about someone’s secrets and legal to ask for money, yet illegal to combine the two. Dominiak observed that some blackmailers are entrepreneurial bluffers: they do not actually intend to reveal the secret if the victim refuses to pay, but they threaten to do so anyway. When a victim pays on the basis of that false belief, the payment is obtained through deception—in other words, fraud. Wysocki accepts this framework and draws a consequential line: only non-fraudulent blackmail exchanges are candidates for economic analysis. Fraudulent exchanges are banned on independent moral grounds, so asking whether they are efficient is beside the point. This narrowing matters, because libertarians standardly treat rights as side constraints on the pursuit of utility; if a practice is unjust, its efficiency is not even up for discussion.

With the moral boundaries fixed, the paper turns to the machinery of welfare economics. Wysocki argues that the Rothbardian branch of libertarianism has so far begged the question of free-market efficiency, relying on Pareto-superior moves and demonstrated preference in a way that assumes rather than demonstrates that market exchanges benefit everyone. Because virtually every legal change creates winners and losers, a purely Pareto-based standard can say almost nothing determinate about whether a legal transition improves social welfare. The paper therefore proposes the Kaldor-Hicks criterion as a uniform tool: a legal change counts as an improvement if the winners could in principle compensate the losers, even if no compensation actually occurs. This criterion avoids the unrealistic assumption of a constant marginal utility of money and sidesteps interpersonal comparisons of utility, requiring only the mild assumption that people prefer more money to less.

The core of the analysis is a stylized three-party scenario. X is a disloyal husband, Y is a blackmailer holding the evidence, and Z is X’s wife. In the first set of valuations, X would pay up to $10,000 to suppress the information, Y values gossiping for its own sake at $5,000, and Z would pay up to $30,000 to learn the truth. Comparing a regime that permits blackmail (P1) with one that bans it (P2), and assuming the information has already been dug up, the paper shows that moving from P2 to P1 is a Kaldor-Hicks improvement: Y strictly benefits, X and Z are no worse off relative to the expectation baseline, and the reverse transition is not an improvement, so the Scitovsky reversal problem does not arise. A second set of valuations, in which X would pay $30,000 and Z only $10,000, yields the same conclusion. In both cases, permitting blackmail is unambiguously economically superior to banning it—provided no externalities affect fourth parties.

That proviso, however, is where the clean result begins to fray. The paper’s next section introduces fourth parties: people who are not part of the bargaining but whose welfare depends on whether the gossip spreads. In a scenario labeled Beneficial Gossiping, four potential receivers of the gossip each value hearing it at $4,000. If blackmail is banned, Y simply spreads the gossip, and the four listeners enjoy a joint surplus of $16,000—more than the $15,000 that X and Y would jointly lose by moving from legalization to prohibition. Under these valuations, banning blackmail is itself a Kaldor-Hicks improvement over permitting it, because the winners could in principle compensate the losers. But the picture reverses again when negative externalities enter: in a scenario called Hurtful Gossiping, X’s mother would be hurt by hearing the gossip as much as if she lost $10,000, and the winners can no longer compensate the losers. The overall verdict on social welfare is therefore indeterminate—it depends entirely on which externalities happen to dominate.

Wysocki also considers whether standard remedies could rescue the case for legalization. Pigouvian taxes or subsidies are supposed to internalize externalities, but the paper argues they would be practically impossible to calculate here. The problem is structural: information is non-rivalrous, and gossip consumers may form a vast group of people each valuing the information positively but negligibly. In one extended example, a million gossip consumers would each pay up to $0.15 to hear the secret, while X would pay $100,000 for silence. For the blackmailer to internalize the positive externalities, he would need to identify every potential customer, sell the information discreetly behind a paywall, and prevent resale—an arrangement he would rationally never pursue when a single lucrative deal with X is available. The result is a socially suboptimal outcome that markets cannot easily fix, illustrating how private efficiencies can diverge from social welfare.

The paper’s most striking finding concerns dynamic efficiency. The allocative analysis took the existence of the embarrassing information as given. But the dynamic analysis asks whether we should incentivize the digging up of such information in the first place. Here the answer is no. If blackmail is legal, blackmailers have an economic reason to expend resources discovering secrets they may ultimately keep buried for money—what the paper calls a wasteful exercise in digging up dirt only to rebury it. Potential victims would also invest in protecting their privacy. Working through the same valuations, the paper shows that prior to any information being discovered, the blackmailer would be willing to pay up to $30,000 to legalize blackmail, while X and Z would jointly be willing to pay $40,000 to ban it. Moving from prohibition to permission is therefore not a Kaldor-Hicks improvement, while the reverse is. Within this stylized model, the incentives created by legalizing blackmail would decrease rather than increase social utility, and the result does not depend on the particular valuations chosen.

The paper is candid about its limitations. The conclusion that blackmail is dynamically inefficient rests on a specific kind of information, and an anonymous referee whose objection the paper discusses at length pointed out that not all secrets are equal. Prohibiting blackmail would discourage the discovery of marital infidelity, which may be socially desirable, but it would equally discourage the discovery of corporate fraud or official corruption, whose revelation is socially valuable. A reasonable legislator might therefore prefer to permit blackmail involving information of high social value, a verdict contrary to the paper’s central conclusion. The paper also acknowledges that its allocative results depend on assuming negligible transaction costs and on the choice of an expectation baseline, and that the possibility of multiple blackmailers pursuing the same secret is deferred to future research.

What emerges is a paper less about blackmail than about how to think about legal institutions economically. By offering libertarians the Kaldor-Hicks criterion as a non-question-begging tool, Wysocki aims to let them examine the institutions they endorse disinterestedly rather than assume their efficiency. The results are deliberately mixed: permitting blackmail produces private efficiencies once information exists, its social welfare effects are indeterminate in the presence of externalities, and its dynamic incentives point toward prohibition. No datasets were generated in the study, which is a purely theoretical exercise. Its lasting contribution may be the demonstration that even a practice as intuitively indefensible as blackmail can look economically defensible under one set of assumptions and indefensible under another—and that the difference between the two lies almost entirely in what we count, and what we leave out, when we tally the costs.

Subject of Research: A theoretical economic analysis of the allocative and dynamic efficiency of legalizing blackmail within a libertarian framework.

Article Title: Blackmail, economic efficiency and libertarianism

Article References: Wysocki, I. (2026). Blackmail, economic efficiency and libertarianism. Humanities and Social Sciences Communications, 13(1), Article 1917. https://doi.org/10.1057/s41599-026-08904-3

Image Credits: AI Generated

DOI: 10.1057/s41599-026-08904-3

Keywords: blackmail, economic efficiency, Kaldor-Hicks criterion, libertarianism, Coasean bargaining, externalities, allocative efficiency, dynamic efficiency, welfare economics, paradox of blackmail, gossip, rent-seeking