August 27, 2010 at 11:56 am

| Gabriel |

Traditional news organizations have a long-standing ethical code (but no legal restriction) against paying their sources. On the other hand, exclusives with sources can be valuable, especially when those sources can tell us about something cool like sex and/or murder involving celebrities (or at least attractive white girls aged 15-30) rather than some boring shit about Congress or whatshisface from that place where they don’t like us.

The Atlantic has a very interesting story about Larry Garrison, a freelance news producer whose job it is to square the circle between the value being offered and the refusal to pay. Mr. Garrison’s basic business model is to quickly identify people who have been thrust into the news, offer to (for lack of a better term) represent them, and then withhold their appearance from news outlets that refuse to take Garrison on as a segment producer. Mr. Garrison mostly gets paid for being a segment producer and his sources either get kickbacks for these producing fees or more often he gets them book deals and/or arranges for them to license various artifacts and footage to the news outlet (the rule against paying sources for testimony allows a loophole for buying photographs, etc, from them and in practice there’s a lot of implicit bundling).

This whole set of business arrangements is similar to payola in two respects, one of which is articulated in Coase and the other described in Dannen.

First, the Coase point is that while payola is often conceived of as a bribe to corrupt the broadcaster it can just as easily be conceived of as a payment for a valuable input and hence a payola prohibition is a monopsonistic cartel: the purchasers of an input conspire to fix a low price. Specifically, record labels refuse to pay anything for publicity and news organizations refuse to pay for sources. This cartel can be informal (as it is with news and as it was with music trade group agreements in 1917 and 1986) or formal (as with the payola law of 1960). Either way, it’s vulnerable to cheating.

Second, the point illustrated in Dannen is that when cheating occurs, the requirements of plausible deniability and/or etiquette will promote the emergence of brokers who can extract rents for their trouble. In the case of news that would be Mr. Garrison and in the case of pop music in the late 1970s and early 1980s that would be a cartel of sketchy radio consultants affiliated with the mafia.

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