Unintended Consequences of Products Liability: Evidence from the Pharmaceutical Market*

An Economic Analysis of Mary Carter Settlement Agreements

Eric Helland, Darius Lakdawalla, Anup Malani and Seth A Seabury

The Journal of Law, Economics, and Organization, 2020, vol. 36, issue 3, 598-632

Abstract: We explain a surprising effect of tort liability in the market for prescription drugs. Greater punitive damage risk seems to increase prescription drug utilization in states without non-economic damage caps but decrease utilization in states with such caps. We offer an explanation for this puzzle. The vertical production process for drugs involves national upstream producers (drug companies) and local downstream producers (doctors). When a single state reallocates liability from downstream to upstream producers, national drug companies see little reason to alter their nationwide output decisions, but local physicians have incentives to increase their prescriptions in that state. The net result is higher local output. We show how this dynamic can explain our puzzle by demonstrating that punitive damages shift liability upstream from doctors to drug companies, but not when non-economic damages caps limit physician malpractice liability. We provide evidence explaining when, how, and why this type of liability shifting occurs (JEL K13, I11, I18).

Date: 2020
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Working Paper: Unintended Consequences of Products Liability: Evidence from the Pharmaceutical Market (2014)
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