Patients with schizophrenia have difficulty recognising the emotion that corresponds to a given facial expression. According to signal detection theory, two separate processes are involved in facial emotion perception: a sensory process (measured by sensitivity which is the ability to distinguish one facial emotion from another facial emotion) and a cognitive decision process (measured by response criterion which is the tendency to judge a facial emotion as a particular emotion). It is uncertain whether facial emotion recognition deficits in schizophrenia are primarily due to impaired sensitivity or response bias. In this study, we hypothesised that individuals with schizophrenia would have both diminished sensitivity and different response criteria in facial emotion recognition across different emotions compared with healthy controls. Twenty-five individuals with a DSM-IV diagnosis of schizophrenia were compared with age and IQ matched healthy controls. Participants performed a "yes-no" task by indicating whether the 88 Ekman faces shown briefly expressed one of the target emotions in three randomly ordered runs (happy, sad and fear). Sensitivity and response criteria for facial emotion recognition was calculated as d-prime and In(β) respectively using signal detection theory. Patients with schizophrenia showed diminished sensitivity (d-prime) in recognising happy faces, but not faces that expressed fear or sadness. By contrast, patients exhibited a significantly less strict response criteria (In(β)) in recognising fearful and sad faces. Our results suggest that patients with schizophrenia have a specific deficit in recognising happy faces, whereas they were more inclined to attribute any facial emotion as fearful or sad.