The Political Economy of News Media: Theory, Evidence and Open Issues

Transcription

1 The Political Economy of News Media: Theory, Evidence and Open Issues Francesco Sobbrio First version: September 1, 2012 This version: March 25, 2013 Abstract This paper provides a survey of the literature analyzing the political economy of news media. The survey discusses the effects of news media on political and public policy outcomes and the theory and evidence analyzing the distortions present in the market for news. I conclude by discussing some open research questions regarding the scope for public intervention in the market for news, and issues relative to the internet and new media. European University Institute. francesco.sobbrio@eui.eu

2 1 Introduction News media are widely recognized as a vital element for the health of modern democracies. Despite the importance of promoting an efficient market for information, the economic literature has started analyzing the market for news only very recently (i.e., in the last decade). Nevertheless, there is already quite a large (and rapidly growing) number of academic contributions addressing a wide range of interesting research questions on news media. There are many possible dimensions along which to categorize this literature. For example, contributions may be characterized according to the type of news media involved, the outcomes analyzed or the rationale they use to explain given stylized facts/empirical evidence. Rather than using a general categorization fitting each contribution, I analyze different strands of the literature separately and propose for each of them a suitable taxonomy. At the same time, throughout the survey I provide a discussion of the links among contributions belonging to different strands of the literature to try to achieve a comprehensive framework. Overall, the literature on the political economy of news media may be divided into three main categories: 1. The literature looking at the effects of the presence of news media on political/public policy outcomes (i.e., assessing the effect of the availability and pluralism of news media on political/public policy outcomes). That is, this literature shares the following research question: do news media have an effect on political/public policy outcomes? 2. The literature trying to capture and explain specific characteristics of the market for news (i.e., establishing whether there is a systematic bias in the reports of news media and providing economic rationales to explain it). That is, this literature shares the following research questions: does media bias exists, why does it exist and what type of bias do we observe? 3. The literature looking at the effects of specific media outlets on political outcomes (i.e., assessing the effects of biased news media on political outcomes). That is, this literature shares the following research questions: does media bias matter and, if so, to what extent? Various excellent surveys of the economic literature on media have already being written. Gentzkow and Shapiro (2008a) focus on the role of competition on the accuracy of news reports and review the implications of academic contributions on this issue. DellaVigna and Gentzkow (2010) survey the effects and drivers of persuasions. Prat and Strömberg 2

3 (2011) provide an extensive review of the political economy of mass media. 1 The present survey incorporates several elements of the above-mentioned reviews while proposing a complementary taxonomy of the literature on the political economy of news media. Section 2 describes the recent academic contributions regarding the effects of news media on electoral participation, the selection of elected officials and on the provision of public goods. Section 3 reviews the literature analyzing the distortions in the market for news. Specifically, it contains a discussion of the main theoretical contributions providing an economic rationale for the presence of bias in the market for news. It then presents the empirical evidence regarding the presence and the effects of media bias. Section 4 concludes by discussing the open research questions regarding the scope for public intervention in the market for news. In addition, it presents the issues relative to the internet and new media that remain open for future research. 2 The effects of news media on political and public policy outcomes This section reviews the fast-growing empirical literature looking at the effects of the availability and pluralism of news media sources on various political/public policy outcomes (e.g., turnout, the incumbency advantage, the selection of politicians and public goods provision). 2 The underlying hypothesis that this literature implicitly aims to test is whether the availability of news media (or, more generally, a higher degree of pluralism in the market for news) improves the level of information of citizens and then translates into changes in electoral politics and public policy outcomes. I discuss here the main recent contributions to this topic and then present a taxonomy of the main features of each of them in Tables 1A, 1B and 1C. 2.1 News Media and Electoral Participation Most existing contributions have focused on the effects of news media on electoral participation. Interestingly, the overall picture emerging from this literature shows that different 1 See also Blasco and Sobbrio (2012) for a discussion on the literature on commercial media bias (i.e., the influence of advertisers on the accuracy of news media). 2 A related literature looks at the effect of biased news media on specific political outcomes (i.e., the influence of ideologically biased news on the vote shares and victory margins of specific political parties/coalitions). Since the research questions and outcomes analyzed by the academic contributions on media bias are slightly different with respect to those of the research reviewed here, the discussion on that literature is presented later in Section

4 types of news media are likely to lead to different effects. The typical mechanism linking changes in the supply of news media and electoral participation hinges on the underlying informative content of news media. Specifically, both decision-theoretical (Matsusaka, 1995) and game-theoretical (Feddersen and Pesendorfer, 1996) models of electoral participation suggest that better informed individuals are more likely to turnout. Indeed, empirical studies looking at the link between voters information levels and turnout typically find a positive correlation between the two(lassen, 2005; Green and Gerber, 2008; Larcinese, 2009; Sobbrio and Navarra, 2010; Degan and Merlo, 2011). The evidence emerging on the effects of news media on electoral participation is consistent with this mechanism. News media typically tend to increase citizens level of information and thus lead to an increase in electoral participation (Strömberg, 2004a; Oberholzer-Gee and Waldfogel, 2010; Snyder and Strömberg, 2010; Gentzkow, Shapiro and Sinkinson, 2011; Schulhofer-Wohl and Garrido, 2011; Drago, Nannicini and Sobbrio, 2013). At the same time, some contributions point out how an increase in the supply of news media may lead to a negative effect on electoral participation due to a crowding-out effect on the existing (and more informative) type of news media (Gentzkow, 2006; George and Waldfogel, 2008). In one of the earliest studies on the political economy of news media, Strömberg (2004a) shows that a higher share of households owning a radio in a given county was associated with a 5.5 percent increase in turnout in US gubernatorial elections between 1920 and The author also shows that the results are robust when instrumenting radios diffusion using the ground conductivity of AM waves. Oberholzer-Gee and Waldfogel (2010) show that the availability of Spanish-language local TV news programs increases turnout among Hispanics in non-presidential election years. In particular, Spanish-language local TV leads 27 percent of non-voters to turnout. That is, the authors show that the availability of local news is indeed relevant when the information provided by such news is relevant for the turnout decision of individuals. A similar positive effect of news media on electoral participation has been found in the context of newspapers. One of the most comprehensive studies of media effects on political and public policy outcomes is that by Snyder and Strömberg (2010). 3 By constructing a novel measure of the congruence between newspapers markets and congressional districts (i.e., share of a newspaper s readership that lives in a given congressional district), their empirical analysis is able to assess the effects of news media on a very rich range of outcomes: voters level of information and turnout, the incumbency advantage, congressmen s 3 Section 2.4 provides a more detailed discussion regarding this contribution. 4

5 behavior and federal spending in any given district. Regarding voters level of information and electoral turnout, Snyder and Strömberg (2010) find that a higher level of congruence is associated with a larger number of newspaper articles about the congressmen belonging to the local congressional district, a higher level of voter information and a higher level of electoral participation. 4 In particular, an increase in the level of congruence from zero to one is estimated to reduce the difference in the turnout rates between congressional and presidential elections by 0.7 percent. Gentzkow et al. (2011) assemble a long (i.e., ) panel of US newspapers to analyze the effect of the entrance and exit of newspapers on political participation and the incumbency advantage. 5 Their identification strategy relies on the large discrete (and onimpact) changes in newspapers readership created by the entries and exits of newspapers in a given county. The evidence emerging from this study shows that newspapers have a robust positive effect on participation in congressional elections. Newspaper entry increases electoral participation in congressional and presidential elections by 0.3 percent. 6 The effect on presidential turnout is statistically more significant in the period (i.e., before the introduction of other news media such as radio and television). The study also shows that in the historical context of US counties the positive effect of newspapers on electoral turnout is mainly driven by the first newspaper entering a county news market. Hence, newspaper competition does not seem to play a significant role in that context. 7 Drago et al. (2013) exploit the same identification strategy as Gentzkow et al. (2011) to look at the impact of changes in the supply of local news provided by different types of newspapers (i.e., local and national newspapers) on a broad range of electoral and public policy outcomes in a sample of medium-large Italian municipalities (i.e., over 15,000 inhabitants) in the period In particular, the authors assess how the entry and exit of newspapers providing local news affect electoral participation, political selection (i.e.,the incumbency advantage and the observable characteristics of elected officials) and government efficiency at the municipal level. Their results show than an expansion in the supply of local news increases 4 The following subsections will review the empirical evidence regarding the other outcomes. 5 Gentzkow et al. (2011) also study the effects of partisan newspapers on party vote shares. Section 3.3 discusses the results relative to this specific outcome. 6 Concerning presidential elections, taking into account the average turnout rate in counties-years with no newspapers (69 percent) and the fact that newspaper entry increases the share of eligible voters reading at least one newspaper by 25 percent, this effect translates into a 12.8 percent persuasion rate (see DellaVigna and Kaplan, 2007). 7 In a related paper, Schulhofer-Wohl and Garrido (2011) provide an empirical case-study exploiting within-city variation to study the effects of the closure of the Cincinnati Post on the competitiveness of elections and turnout in the Kentucky suburbs most reliant on the Post. The authors show that this closure decreased voters turnout. 5

6 turnout in municipal election by 0.46 percentage points. 8 Moreover unlike Gentzkow et al. (2011) the evidence shows that competition plays a relevant role in that context since the effects are not driven (only) by the first newspaper(s) entering the market for local news. Indeed, newspapers still remain the main source of news in Italy as far as local information is concerned. Therefore, the results seem to suggest that the entrance of competing news sources in the market for local news is likely to be beneficial for voters. On the other hand, other contributions show that a change in the supply of news media may actually create a negative effect on electoral participation. The basic intuition emerging from these empirical analyses suggests that an increase in the supply of news media may create perverse (i.e., negative) effects on electoral participation when it indirectly affects the consumption of the pre-existing news media. That is, the creation or expansion of certain types of news media may create a crowding-out effect on other news media. This mechanism is quite evident both in Gentzkow (2006) and George and Waldfogel (2008). Gentzkow (2006) analyzes how the different timing of the introduction of television in US counties impacted changes in electoral participation. The author shows that television reduced turnout in electoral years with no presidential elections. Gentzkow also shows that this effect is quite large, i.e., it accounts for half of the total decline in turnout (in years with no presidential elections) observed in the US since the 1950s. Moreover, he provides convincing evidence that the mechanism leading to the effect is based on the introduction of television crowding-out the existing news media (i.e., newspapers and radio) and the consequent decrease in the level of political information of citizens. Indeed, the empirical analysis shows that the introduction of television created a sharp decrease in newspaper and radio consumption. Moreover, using data from the 1952 National Election Study, Gentzkow shows how respondents in counties with television were less likely to be able to name candidates running in the election. Finally, the empirical results are consistent with a large amount of evidence showing that television news contained substantially less political information with respect to the political news provided by radio and newspapers. Hence, Gentzkow (2006) demonstrates how the introduction of a new type of news media (such as television) may indeed decrease the level of political information, and hence political participation, by crowding-out the consumption of pre-existing and more informative news media (such as radio and newspapers). A similar underlying mechanism emerges from the study by George and Waldfogel (2008) looking at the expansion of home delivery of the New York Times in 8 Given the turnout rate in city-years not experiencing a positive change in the supply of local news (77 percent) and that such a change leads to a 11 percentage point increase in readership per capita, this effect corresponds to a 18.2 percent persuasion rate. 6

7 one hundred cities in the US. The study shows that this expansion lead to a decrease in political participation in congressional elections among highly educated voters. The authors argue that this effect was the consequence of highly educated voters shifting their consumption from local to national news. Indeed, the empirical results from a companion paper (George and Waldfogel, 2006) show that, as a response to this expansion, local newspapers changed their coverage by going more local (i.e., targeting less educated consumers). 2.2 News Media and Political Selection The literature has so far analyzed the effect of news media on political selection by looking at: i) whether news media affect the chances of incumbent politicians being re-elected; ii) whether news media have an impact on the type of politicians who get into office Incumbency Advantage The overall effect of news media on the chances of incumbent politicians being re-elected is not straightforward. Prat and Strömberg (2011) show that an increase in the amount of media coverage increases, on average, the incumbent s vote share. Indeed, since politicians react endogenously to changes in the media environment, an expansion in the supply of news media may make it easier for good politicians to signal their type and, more generally, it increases the incentives for politicians to exert effort. 9 On the other hand, Besley and Prat (2006) show that an increase in the number of media outlets decreases the probability of media capture by a low-quality (or corrupt) incumbent. 10 Hence, from this perspective an increase in the supply of news media is likely to decrease the incumbency advantage and increases the turnover of politicians. 11 These diverse theoretical predictions are reflected in the mixed empirical evidence found in the literature. Some studies do not find any significant effect in either direction (Ansolabehere, Snowberg and Snyder, 2006; Gentzkow et al., 2011). Ansolabehere et al. (2006) analyze the link between TV news and the incumbency advantage by comparing counties located in in-state TV markets (television markets centred in a given state) with those located in out-of-state TV markets (television markets centred outside a given state). The evidence emerging from this study suggests that television news coverage does not have any 9 A similar point is made in Gentzkow et al. (2011). 10 Section presents the main features of the theoretical model of Besley and Prat (2006) in the context of supply-driven models of media bias. 11 However, as noticed by Gentzkow et al. (2011), the direction of the effect of the entrance of the first news medium in the market on the incumbency advantage is ambiguous. 7

8 significant effect on the incumbency advantage in the US senate and for state governors. Similarly, the above-mentioned study by Gentzkow et al. (2011), on the effect of newspaper entries and exits in US counties, does not find any significant effect of newspapers on the incumbency advantage in the US Congress. Other studies find a positive (Snyder and Strömberg, 2010; Drago et al. 2013) or negative (Ferraz and Finan, 2008; Fergusson, 2012) effect of news media on the incumbency advantage. 12 Snyder and Strömberg (2010) find a significant positive effect of newspapers congruence on the incumbency advantage of US congressmen (in the 8-12 percent range). Drago et al. (2013) show that an expansion in the supply of local news provided by newspapers enhances the probability of an incumbent mayor being re-elected (conditional on her deciding to run for a second term) by 14 percent. 13 Instead, consistent with the theoretical predictions of Besley and Prat (2006), Ferraz and Finan (2008) show that the presence of a local radio station in Brazilian municipalities, has a negative and significant effect on an incumbent mayor probability of being re-elected in the presence of evidence of corruption emerging from random audits by the central government. 14 The link between news media, capture of politicians by special interest groups and the incumbency advantage is explored by Fergusson (2012). 15 His analysis (focusing on the period ) shows that the negative effect of special interest contributions on the incumbency advantage of a member of the Senate in the US is higher in in-state counties relative to out-of-state counties. Hence, the results suggest that news media indeed play the role of watch-dogs with respect to incumbent politicians. In fact, incumbents captured by special interest are punished more heavily by voters in areas where the news media are likely to allocate more time to news on each incumbent politician. 16 Overall, the picture that emerges from the theoretical and empirical literature on the link between news media and incumbent politicians suggest that news media are likely to reduce the chances of corrupt or captured politicians being re-elected. At the same time, on average, news media do not necessarily help challengers to overcome the electoral advantage 12 The study by Schulhofer-Wohl and Garrido (2011) also finds a negative effect of news media on the incumbency advantage. Namely, the closure of the Cincinnati Post increased the incumbency advantage in the Kentucky suburbs most reliant on the Post. 13 At the same time, newspaper entry does not seem to have a statistically significant impact on an incumbent mayor s decision to run for a second term. 14 Brunetti and Weder (2003) present a cross-country analysis showing a negative correlation between corruption and press freedom. 15 The empirical strategy is analogous to that of Ansolabehere et al. (2006). 16 The estimates show that the incumbent s vote share is reduced by 0.5 to 1.5 percentage points by a one standard deviation increase in concentration of special interest contributions in in-state counties relative to out-of-state counties. 8

9 of incumbent politicians since these may endogenously respond to changes in news media coverage of their performance (e.g., by exerting more effort). Moreover, as shown by Fergusson, Vargas and Vela (2013), in a weakly institutionalized environment this endogenous response might even be harmful for voters. In particular, the author focus on the parapoliticians scandal in Colombia where several senators colluding with illegal paramilitary armed groups were exposed by the national newspapers around the 2006 national elections. By comparing parapoliticians exposed before and after the elections, the analysis provides evidence of the endogenous response of corrupted politicians to negative news. Indeed, the results show that parapoliticians exposed before the election concentrated their votes in areas with high paramilitary presence (and weaker institutions) more than the ones exposed after the election. Therefore, Fergusson et. al (2013) suggest that the fourth estate might not be very effective in increasing political accountability when the other pillars of democratic institutions are weak. Furthermore, the absence of strong democratic institutions providing the necessary support to sustain the watch-dogs effort of news media may even result in unintended negative effects as, for example, increasing the incentives of corrupt politicians to engage in coercion and electoral frauds Characteristics of elected politicians The literature attempting to assess the effect of news media on elected politicians type is rather limited. Snyder and Strömberg (2010) analyze the role of newspaper congruence in this context by exploiting politicians behavior over time. Specifically, by controlling for politician fixed effects, they indirectly disentangle selection from incentive effects. The evidence they find is mixed: greater congruence in media markets leads to more appearances of US House representatives standing witness in Congress only through incentive effects. Instead, congruence appears to decrease party loyalty both through a selection and an incentive effect. Drago et al. (2013) propose a more direct approach by looking at the effect of newspaper entry and exit on the observable characteristics of elected officials(i.e., mayors), namely, the elected mayor s age, gender, education level and her previous employment status. These variables are intended to capture a broad spectrum of personal characteristics in order to assess the extent of possible newspaper influence on the selection of politicians along several dimensions. In particular, by looking at whether an expansion in the supply of local news affects the elected mayor s gender and age, the analysis implicitly provides evidence on whether newspapers influence the chances of underdog candidates being elected. 17 At the 17 Women and younger individuals are underrepresented in Italian politics. The percentage of female mayors is 7 percent and the mayors average age is around 50 years. 9

10 same time, the mayor s education level may represent a proxy for the politician s quality and her previous employment status may be correlated with her idiosyncratic skills in managing the municipality. However, the evidence emerging from this study shows that newspapers do not have any statistically significant impact on any of these (observable) characteristics of elected mayors (in either direction). Hence, newspapers do not seem to have a first-order effect on elected politicians type. 2.3 News media and the provision of public goods Various studies have analyzed the impact of news media on citizens welfare by looking at public policy outcomes (Besley and Burgess, 2002; Strömberg, 2004a; Eisensee and Strömberg, 2007; Snyder and Strömberg, 2010; Drago et al. 2013). Besley and Burgess (2002) study the relationship between newspapers circulation and food distribution/calamity reliefs spending in Indian states. The authors show that greater newspaper circulation is associated with the state government being more responsive to flood damages and falls in food production. Moreover, the analysis shows that this positive correlation is mainly driven by local newspapers (i.e., newspapers in the local/state language). Instead, English or Hindi newspapers do not seem to play any significant role. Finally, to address possible endogeneity issues, the authors instrument newspaper circulation by using data on newspaper ownership. The results show that a higher degree of private ownership of newspaper (rather than political party ownership) is associated with greater newspaper circulation. In a similar spirit, the above-mentioned study by Strömberg (2004a) also analyzes the impact of radios diffusion across US counties on relief funds during the New Deal. The empirical results show that counties where a higher proportion of the population owned radios received a higher level of relief funds from the Federal Emergency Relief Administration (FERA) between 1933 and EisenseeandStrömberg(2007)lookathowtheexogenousnewsworthinessofnatural disasters affects the extent of foreign aids by the US Government. The study first documents the varying newsworthiness of different natural disasters for US television networks. Their estimates suggest that a natural disaster taking place in Africa has the same probably of being covered in the news as a similar disaster taking place in eastern Europe provided that the number of victims in the African disaster is 46 times higher than the one in eastern Europe. Similarly, volcano and earthquake disasters are much more likely to be reported on US television news with respect to other disasters such as floods or droughts. The analysis 18 A one-standard deviation increase in the share of household with a radio corresponds to a 9 percent increase in the per capita relief funds allocated to a county. 10

11 also exploits the presence of the Olympic Games to instrument for the presence of exogenous shocks in the newsworthiness of natural disasters (i.e., the Olympic Games crowd-out the news coverage of natural disasters). The overall results show that news coverage of natural disasters has a causal impact on the extent of foreign aids by the US Government. Snyder and Strömberg (2010) find that counties located in congressional districts with more congruent news media markets receive greater federal transfers per capita. 19 In conclusion, the evidence presented by the literature points in the direction of a causal effect of news media on higher levels of public good provision. The evidence presented by these studies is mostly concerned with the allocation of public goods/public spending. Hence, it does not provide a definitive answer on whether news media improves the overall efficiency of public good provision/public spending. Drago et al. (2013) focus on this specific issue by looking at government efficiency at the municipality level. Their estimates show that the entry of newspapers in the market for local news enhances the efficiency of the municipal government by increasing the speed of revenue collection. 20 In particular, an expansion in the supply of local news increases the speed of revenue collection by 3 percent. Moreover, this effect is larger (7 percent) - and statistically more significant - when incumbent mayors are not term-limited and thus face re-election incentives. 2.4 The chain of news media effects: electoral participation, selection of elected politicians and public good outcomes Clearly, the ideal setting for assembling a comprehensive picture of the overall spectrum of news media effects requires the presence of a very rich set of information encompassing several dimensions. Indeed, while greater electoral participation is usually considered an improvement in the efficiency of the electoral process, the relevance of this effect to citizen welfare ultimately depends on whether these changes also translate into improvements in the supply of public goods. At the same time, in order to understand the mechanism underlying changes in the supply of public goods due to changes in the news media environment, it is necessary to first assess the impact of news media on electoral politics and on the selection of elected politicians. That is, to understand the overall impact of news media on public policy outcomes and identify the mechanism behind it, it is crucial to look at the impact of changes in the supply of news media on the overall spectrum of political outcomes: how voters 19 A one standard deviation increase in congruence increases federal spending by 3 percent. 20 This represents a variable capturing the effectiveness of the municipal government in fighting tax evasion and in implementing centrally financed public works. 11

12 respond to these changes and how these changes impact the selection of elected politicians and, then, the final public policy outcomes. A very limited number of contributions contain a set of information rich enough to be able to encompass all these dimensions. The study by Snyder and Strömberg (2010) described above, represents one of the few exceptions. Indeed, it provides a comprehensive analysis of each step in the causal mechanism linking news media and political outcomes. The overall picture emerging from this study show that news media have a positive impact on political and public policy outcomes through the information channel. That is, a greater congruence of newspapers with electoral districts increases voter information and, then, translates into more accountability of elected politicians. Similarly, the empirical analysis by Drago et al. (2013) provides a comprehensive study of the effects of a change in the supply of news media on electoral politics (i.e., turnout in municipal elections), the selection of politicians (i.e., the probability of the incumbent mayor being re-elected and observable characteristics of elected politicians) and government performance (i.e., the efficiency of the municipal government). The empirical results provided by this study suggest that the entry of newspapers in the market for local news increases the effort exerted by incumbent mayors in managing the municipality efficiently. Then, voters reward this higher effort by incumbent mayors by increasing their electoral support and thus enhancing their probability of being re-elected. At the same time, the impact of newspapers on government efficiency is larger and statistically more significant when the incumbent mayor is not term-limited. Moreover, as discussed above, newspapers do not seem to have any effect on the observable characteristics of elected mayors (i.e., age, gender, education, employment status). Therefore, these results suggest that while newspapers have an relevant effect on the accountability of elected politicians (i.e., on what politicians do once in office), they do not seem to have a major impact on the selection of politicians (i.e., on who gets into office). Finally, the evidence emerging from this study suggests that local newspapers (rather than national ones) are the main driver of the results. Indeed, as discussed above, the entry of a national newspapers in the market for local news may create a crowding-out effect on local newspapers (see George and Waldfogel, 2008). Moreover, anecdotal evidence seems to suggest that local newspapers provide more extensive coverage of local politics with respect to national ones (Drago et al., 2013). Tables 1A, 1B and 1C below provide a taxonomy of the empirical literature on the effects of news media on political and public policy outcomes. The information contained in each table summarizes(in chronological order) the main characteristics and results of each contribution. [Table 1A here] 12

13 [Table 1B here] [Table 1C here] 3 Distortions in the market for news: theory, evidence and implications The ideal of unbiased news reporting represents the milestone of news media services in several countries. For example, the idea of fair and balanced news reporting was at the foundation of the FCC Fairness Doctrine in the US. 21 Similarly, as stated by the BBC in the UK, impartiality lies at the heart of public service and is the core of the BBC s commitment to its audiences. 22 However, this ideal appears quite far from reality. Scholars of communications studies and journalists have provided substantial anecdotal evidence suggesting that the information supplied by news media to their viewers is often far from being fair and balanced (e.g., Goldberg, 2002; Alterman, 2003; Bagdikian, 2004; Davies, 2008). Indeed, significant deviations from the standard of unbiased news seem to be present even in fairly competitive media markets such as, for example, the US. Deviations from the standard of unbiased news may take different forms. Clearly, journalists may create a bias in their news reports by reporting false information. However, this represents the least common mechanism of media bias. Indeed, the expected reputation cost paid by journalists and news media upon presenting false information may be extremely high. For example, in 2004 CBS News presented (false) documents claiming that the US president George W. Bush did not properly fulfill his duties in the US army. The exposure of CBS to the falsehood of this information lead the journalist and the executive producers in charge to be forced to resign. Indeed, journalists and news media do not need to lie to create a bias in their news reports. They may be able to introduce such a bias even when the information they provide is hard and verifiable. As Posner (2005) points out: 23 Not that the media lie about the news they report; in fact, they have strong incentives not to lie. Instead, there is selection, slanting, decisions as to how 21 The fairness doctrine was introduced in the US in 1949 and abolished in It required media outlets to give representation to opposing viewpoints for any subject matter. A similar principle (i.e., par condicio) is in place in Italy during electoral campaigns where political news programs are mandated to allocate the same time to the representatives of different political parties Quoted in Anderson and McLaren (2012). 13

14 much or how little prominence to give a particular news item. (Posner 2005). The main mechanisms inducing a bias in media reports may be summarized as follows: 1. Selective omission of information. Media may create a bias in their news reports by selecting which information to report to media viewers on a given issue. That is, media bias may simply be the result of the omission of information which would collide with the news organization s agenda. (Anderson and McLaren, 2012) Issue selection/agenda Setting. A slightly different media bias mechanism is represented by the choice of which type of information to report to media viewers. Indeed, editors and journalists have a large degree of freedom in deciding what is newsworthy and what is not, and these choices influence the perception of citizens about which issues are relevant and to what extent (Larcinese, Puglisi and Snyder, 2011, page 1178). 3. Framing. Media may create a bias in news reports by using language that would tend to sway readers to the right or to the left on political issues (Gentzkow and Shapiro, 2010, page 36). 4. Slanted endogenous information acquisition. Media bias may arise from the way editors/journalists gather information in the first place. Indeed, in the process of acquiring information before producing a news report, editors/journalists with different ideological preferences are likely to end up with different sets of information. That is, the bias in a media outlet s news reports may be the result of the slanted optimal information acquisition strategy of its editor/journalists (Sobbrio, 2012, page 1). 25 Clearly, the above media bias mechanisms are not mutually exclusive. The final bias in news reports is likely to be a mix (i.e., a weighted sum) of all of them. My discussion on media bias is structured as follows. First, I will review the theoretical literature providing an economic rationale for the presence of bias in media reports. Second, 24 Aloui and Germano (2012) propose a more sophisticated version of this mechanism where media outlets place undesired news in a ranking position that will not be reached by readers in equilibrium given their skipping costs. 25 For example, as shown in Sobbrio (2012), a leftist editor/journalist requires a small amount of evidence in support of a leftist candidate to stop investing in information acquisition and endorse that candidate. On the other hand, a leftist editor/journalist will endorse a rightist candidate only after having collected a large amount of evidence in support of that candidate. Instead, moderate editors have a balanced information acquisition strategy. That is, the amount of evidence in support of a leftist candidate that a moderate editor/journalist requires in order to stop collecting information and produce a report in favour of such a candidate is the same as that she requires to produce a report in favour of a rightist candidate. Section provides a discussion of the main features of this model. 14

15 I will present the empirical evidence showing that there indeed exists a systematic bias in media reports. Furthermore, I will discuss the relationship between the empirical evidence on media bias and the theoretical contributions. Finally, I will discuss the empirical evidence of the effects of media bias. 3.1 Why does media bias exist? Theoretical models of media bias Economics scholars have proposed alternative (and complementary) rationales for the presence of bias in media reports. There are two main categories in which each theoretical model may be framed. Part of the literature has proposed supply-side explanations of media bias: the bias in a media outlet s news reports is the result of the preferences for biased news of agents on the supply-side of the news market. That is, this literature assumes that there are agents who may benefit from delivering biased news to media viewers (i.e., journalists, media owners, incumbent governments/politicians, lobbies, advertisers). The other part of the literature has tried to rationalize the presence of media bias without assuming the presence of any bias deriving from the supply-side. That is, this strand of the literature identifies alternative economic rationales for the demand for biased news Supply-driven media bias The contributions offering a supply-driven explanation for the presence of bias in news reports maybe divided into two sub-categories: 1. Those assuming idiosyncratic preferences for biased news within the media industry, i.e., ideological bias by journalists (Baron, 2006) and media owners (Anderson and McLaren, 2012). 2. Those considering external actors putting pressure on the media to deliver biased news contents, i.e., incumbent government/politicians (Besley and Prat, 2006), lobbies (Baron, 2005; Sobbrio, 2011; Petrova, 2012), advertisers (Ellman and Germano 2009; Blasco, Pin and Sobbrio, 2011; Germano and Meier, 2013). Baron (2006) identifies journalists preferences for publishing stories that could enhance their career prospects as the main driver of media bias. The basic assumption is that biasing news in a given direction (e.g., publishing news emphasizing the risk involved in a given issue/product) is likely to increase the journalist s fame. At the same time, while consumers/viewers always dislike bias (since it reduces the accuracy of news reports), media 15

16 outlets may find it optimal to allow a certain degree of discretion to journalists. In particular, profit-maximizing media outlets face a trade-off between restricting the extent of journalists discretion and paying journalists a higher wage. That is, journalists wages and the accuracy of news are substitutes in media outlets profit functions. Therefore, profitmaximizing media outlets may end up tolerating bias in their journalists news reports since allowing this discretion to their journalists results in lower operating costs (i.e., lower labour costs). An interesting implication of the model suggests that low-quality media outlets may end up being more profitable than high-quality ones. Moreover, competition may also increase the average bias present in news reports (since it may increase incentives to media outlets to grant greater discretion to journalists in order to save on labour costs). Anderson and McLaren (2012) look more directly at the bias arising from the political agenda of media owners. That is, the utility function of media owners incorporates both the desire to maximize profits and the desire to influence the political choice of media viewers. The authorspointoutthatinthiscontextcompetitionplaysakeyroleindecreasingtheextentof media bias. As a consequence, they identify an important implication of media mergers: by decreasing the amount of competition, media mergers may also lead to a perverse effect on media bias. As the authors point out, this is a crucial insight for media regulators. Indeed, media regulators and competition authorities tend to evaluate media mergers mostly in terms of their consequences for pricing behavior, while less emphasis is placed on their consequences for media contents. As has been evident in the recent case of the proposed News Corporation/BSkyB merger in the United Kingdom, evaluation of the consequence of a merger on public welfare in the context of news media is likely to be more complex than in a traditional merger case. Indeed, in order to properly evaluate the consequences of such a merger in terms of media contents, media regulators are required to establish a rather complex counter-factual of the post-merger media contents. A similar implication for the beneficial effects of media competition arises from the analysis by Besley and Prat (2006). Their theoretical framework considers a model where an incumbent government/politician may influence media reports by offering a transfer (e.g., a bribe) to a media outlet in order to not reveal bad news. This represents the benchmark model of media capture. In this setting, competition has clearly beneficial effects on the likelihood of observing accurate news reports, since a higher number of media outlets makes it harder (i.e., more costly) for the incumbent government to capture all the media sector (i.e., prevent bad news being revealed). The authors also provide an empirical analysis of their model showing that state ownership and concentration enhance the prospect of capture while foreign ownership is 16

17 correlated with greater media efficiency. At the same time, other actors may also be eager to induce the media to supply biased information to their viewers. Lobbies represent obvious candidates for such a role. Political lobbies may use different instruments to influence the news contents of media. First, they may offer direct payments to media outlets in exchange for favourable news contents (Petrova, 2012). Lobbies may also provide media with hard information in support of their preferred policy (Baron, 2005) or, more generally, they may exert effort to influence the overall evidence found by the media on a given issue (Sobbrio, 2011). 26 Advertisers may also exert pressures on news media to influence their contents. This type of influence by advertisers on news media has been referred to as commercial media bias (Ellman and Germano, 2009). Some scholars (Baker, 1994; Bagdikian, 2004; Hamilton, 2004) argue that the fact that almost all type of news media need advertising revenues to remain profitable may represent a dangerous source of distortion of media contents. Indeed, advertisersdonotonlycareabouthowmanyviewerstheymayreachthroughamediaoutlet. Specifically, the non-advertising contents provided by a media outlet are likely to be very relevant as well. As a consequence, advertisers may exert financial pressure on the media in order to indirectly control their contents. This control may take two different forms. In the context of target advertising (e.g., Gabszewicz, Laussel and Sonnac, 2001, 2002; George and Waldfogel, 2003; Hamilton, 2004; Strömberg, 2004b; Bergemann and Bonatti, 2011; Gal- Or, Geylani and Yildirim, 2012) advertisers may induce news media to only cover issues preferred by (or relevant for) specific groups (i.e., to cater to specific demographics). On the other hand, advertisers may simply want the media to produce favourable news reports (e.g., hide any negative information concerning their products). This type of advertiser influence on news contents may negatively affect media accuracy (Ellman and Germano, 2009; Blasco et al. 2011; Germano and Meier, 2013). As documented in Ellman and Germano (2009) and Blasco and Sobbrio (2012), this distortion has been quite evident in the case of tobacco companies exerting pressure on US media to hide any negative information on the adverse consequence of tobacco products. 27 Nevertheless, while pressure by advertisers on news contents may decrease the accuracy of news reports regarding consumer products, 26 For example, lobbies may employ ideological think tanks to produce research in support of their policy proposals. Rich (2004) identifies 165 think tanks in the US as being ideologically oriented (i.e., either conservative or liberal). Indeed, think tanks often provide a platform for particular viewpoints by packaging and popularizing policy proposals (Harvard Law Review. 2002: 15203). 27 As Blasco et al. (2011) show, whether or not advertisers have negative effects on the accuracy of news reports ultimately depends on the extent of correlation among advertisers products. Specifically, the lower the correlation among the qualities of the advertisers products, the (weakly) greater the accuracy of the media outlet s reports. 17

18 the development of advertising has allowed modern news media to be able to afford to be politically independent (Petrova, 2011). 28 Section 4.1 provides a more detailed discussion of the trade-off between the accuracy of political and non-political news and, then, derives some implications regarding the scope for public intervention in the market for news. Table 2 summarizes(in chronological order) the features of the main theoretical contributions providing a supply-driven rationale for media bias by classifying each of them according to its main assumptions, rationale and implications. [Table 2 here] Demand-driven media bias The implicit starting point of any demand-driven rationale for media bias is rooted in the idea that if viewers always (and only) value full accuracy in news reports, in fairly competitive media markets any supply-driven media bias should fade away. Hence, media bias should be a phenomenon limited to non-competitive media environments. The fact that this does not seem to be the case has lead economics scholars to also look for mechanisms providing a rationale for the demand for biased news. An informal statement of this logic is well summarized by The Economist: Bias can be thought of as a supply-side phenomenon that arises from ideology. Owners or employees political views will determine how a newspaper or channel slants its coverage of a piece of news. But this does not square with the assumption that readers and viewers value accuracy. If so, then competition should hurt media outlets that systematically distort the news (in any direction). The brouhaha about bias in America, as free a media market as any, suggests something else is going on. (A Biased Market, The Economist, October 30, 2008) Indeed, the first approach to tackling this issue has been to assume that readers and viewers simply do not value accuracy. That is, media consumers may have some exogenous preferences for acquiring information from a like-minded source (Mullainathan and Shleifer, 2005). The model in Mullainathan and Shleifer (2005) assumes that news media readers are interested in the value of a variable t N(0,v) (e.g., the state of the economy). Readers have some prior beliefs about t which can be biased but have the correct variance. The 28 Advertisements may also be used by incumbent politicians/governments as a tool to influence/control news media as shown by Di Tella and Franceschelli (2011) in the case of Argentina. 18

19 news media receives some information about t (i.e., d = t+ε) and then may decide to slant the news by reporting n = d+s. In such a setting, if readers were rational they would not like the news media to add any slant in their news reports. Therefore, regardless of the extent of competition in the market for news, profit-maximizing media outlets would report unbiased information (i.e., s = 0). The main part of the analysis focuses, instead, on the situation where readers have a disutility from receiving news inconsistent with their prior beliefs and where the news media announce their slanting strategy s(d) before receiving d. The results show that in such a setting competition in the presence of heterogeneous readers (i.e., readers holding different prior beliefs) tends to increase the ideological slant of news media (i.e., competition in the market for news tends to increase media bias). At the same time, Mullainathan and Shleifer (2005) point out that conscientious readers (i.e., readers cross-checking multiple media sources) may end up with relatively accurate beliefs by gathering information from news media with different ideological slants. Therefore, the main message of the model is that media competition in presence of heterogeneous readers may actually increase the accuracy of readers posterior beliefs contingent on them cross-checking news from different media outlets. On the other hand, Gentzkow and Shapiro (2006) propose a theoretical model where media bias arises from the reputation concerns of profit-maximizing news media. Specifically, their model considers a news media outlet which receives a signal s (r,t) on a binary state of the world (R,T). The news media outlet is of high-quality with probability λ in which case the signal it receives is perfectly informative. Instead, with probability (1 λ) the news media outlet is normal, i.e., the signal it receives is correct with probability π. News consumers are homogenous (they hold the same prior beliefs θ regarding the probability of the state of the world being R). They receive a payoff of one if their action matches the state of the world. The normal news media outlet has no cost for misreporting its signal. However, it cares about its reputation. Specifically, its continuation payoff is an increasing function of the news consumers posterior beliefs regarding its quality. Applying a similar logic to that of the literature on herding on the priors (Brandenburger and Polak, 1996), the model shows that the posterior beliefs of news consumers on the probability of the news media being high-quality upon reporting ˆr is higher the more their prior beliefs are tilted towards R being the true state of the world (i.e., the higher θ is). Indeed, as θ increases, the probability that a high type reports ˆr, increases faster than the probability that a normal type reports ˆr, since the latter s report is more weakly related to the true state. (Gentzkow and Shapiro, 2006, page 292). As a consequence, the normal quality news media has an 19