Disinformation, Stochastic Harm, and Costly Effort: A Principal-Agent Analysis of Regulating Social Media Platforms

The spread of disinformation on social media platforms is harmful to society. This harm may manifest as a gradual degradation of public discourse; but it can also take the form of sudden dramatic events such as the recent insurrection on Capitol Hill. The platforms themselves are in the best position to prevent the spread of disinformation, as they have the best access to relevant data and the expertise to use it. However, mitigating disinformation is costly, not only for implementing detection algorithms or employing manual effort, but also because limiting such highly viral content impacts user engagement and thus potential advertising revenue. Since the costs of harmful content are borne by other entities, the platform will therefore have no incentive to exercise the socially-optimal level of effort. This problem is similar to that of environmental regulation, in which the costs of adverse events are not directly borne by a firm, the mitigation effort of a firm is not observable, and the causal link between a harmful consequence and a specific failure is difficult to prove. For environmental regulation, one solution is to perform costly monitoring to ensure that the firm takes adequate precautions according to a specified rule. However, a fixed rule for classifying disinformation becomes less effective over time, as bad actors can learn to sequentially and strategically bypass it. Encoding our domain as a Markov decision process, we demonstrate that no penalty based on a static rule, no matter how large, can incentivize adequate effort. Penalties based on an adaptive rule can incentivize optimal effort, but counterintuitively, only if the regulator sufficiently overreacts to harmful events by requiring a greater-than-optimal level of effort. We prescribe the design of mechanisms that elicit platforms' costs of precautionary effort relating to the control of disinformation.