Facts, fiction, and the fourth estate: the Washington Post and "Jimmy's World"

American Journal of Economics and Sociology, The, Nov, 2004 by William L. Anderson

Adam Smith in The Wealth of Nations outlined the basic conflict of interests between owners of a firm and those who manage it or work in its employ. He writes that "the directors of ... companies, being the managers of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which (owners) watch over their own" (1976, p. 741). In his example of the agent-principal problem, Smith referred to the East India Company, the Hudson's Bay Company, and the Royal African Company. Had he been alive in 1981, he might have included the Washington Post. The system set up by the company's principal owners to monitor malfeasance on behalf of its reporters broke down that year. The Post found itself in 1981 the "poster child" for journalistic hoaxes that would culminate with the world-famous newspaper of Watergate fame having to return a Pulitzer Prize because the honored story turned out to be fiction.

This paper explores the infamous Janet Cooke affair at the Post. I first attempt to find if its admission that the Pulitzer-Prize-winning story, "Jimmy's World," was a fraud caused an abnormal drop in the stock price of the Washington Post Company, thus reducing the wealth of residual claimants.

I

Agency Theory and Journalism

THE FIRST STEP IN ANALYZING the Janet Cooke affair at the Post is to examine the actions of journalists through agency theory. The neoclassical theory of the firm is built on the assumption that the firm is a profit-maximizing enterprise. The firm uses resources efficiently and is attuned to consumers' wants in order to achieve that goal.

The owner-principal has two problems. The first is to monitor the performance of each individual employee, and the second is to reward that performance. In that regard, the job of the owner of a newspaper to monitor reporters is not quite as difficult. Reporters write stories, and it is relatively easy to determine the frequency and popularity of those articles. It is less easy, however, to determine their accuracy.

Like employees in other difficult-to-monitor situations, journalists can capture rents. They do so by writing successful news stories, according to McChesney (1987). He conducted statistical tests to find whether or not the Washington Post profited financially from its extensive coverage of the Watergate scandal, an event that was brought to light largely through the Post's efforts.

He concludes that while the residual claimants of the Post did not receive abnormal returns from the newspaper's Pulitzer-Prize-winning coverage, the surge of public interest in Watergate news from the Post created financial windfalls. These rents, however, were captured both by advertisers who experienced a wide-than-anticipated audience for their products and by reporters who wrote the Watergate stories. Bob Woodward and Carl Bernstein likely would not have become "rich and famous" were it not for their pursuit of the story of what had been called a "third-rate burglary."

Because newspapers gain most of their revenues from advertising sales (McChesney 1987), it becomes more difficult to measure the newsroom itself as a profit-maximizing entity. The short-run relationship between the firm's profitability and its news production is indirect. News affects circulation, and circulation affects advertising. News does not directly affect the profits of the media firm, at least in the short term, according to McChesney.

The prospect of reporters capturing rents creates problems within the newsroom, as journalists compete with each other for prominent stories. The National News Council (1981) points out that competition among Post reporters for Page One exposure of their work is fierce:

   The newsroom of the Washington Post is an intensely competitive
   place, one in which many reporters tend to compete with one another
   for Page One prominence.... Council staff in its interviews with
   individual reporters found plentiful confirmation for the resulting
   picture of a newsroom in which temptations are strong to court
   editors' favor by stretching every story to the ultimate--and
   perhaps, as in Miss Cooke's case, beyond. (pp. 47-48)

Well-received stories by Post writers also have a good chance to be nominated for journalistic prizes, and especially the prestigious Pulitzer Prize. Winning such awards is a way to stardom and higher pay in the profession. The incentive for opportunistic behavior on behalf of journalists and editors exists not only at the Post but at other newspapers as well. Opportunistic behavior in this case is defined as the failure of reporters and editors to report news accurately when the information needed to do so is available to those parties, but not to the general public.

Such an interpretation, however, is questionable. It might be possible that inaccuracy or even outright falsehoods like "Jimmy's World" can damage the "reputational capital" of the firm. For example, the loss in the Wallace Butts libel suit in 1967 cost the Saturday Evening Post much more than what it paid to Butts and the lawyers on both sides. (1) The very, public loss of credibility led to the demise of the magazine as a prestigious publication. A newspaper such as the Washington Post must have credibility in order to influence policymakers in the nation's capital city.