Heterogeneous physicians, lawsuit costs, and the negligence rule

Anja Olbrich

International Review of Law and Economics, 2008, vol. 28, issue 1, 78-88

Abstract: Real-world observations of negligent and defensive medicine challenge malpractice liability. Based on a principal-agent model with two types of physicians I show that lawsuit costs affect the patients' decision to sue and the physicians' level of care under the negligence rule, leading to a separated equilibrium in care. Given these conditions, punitive damages allow for a pooled equilibrium where all physicians exert first-best care. If courts cannot use punitive damages, a second-best solution arises with an optimal negligence standard that deviates from first-best care.

Date: 2008
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