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Allocating Liability among Several Physicians: A Theoretical Model
Abstract
Healthcare treatment can be considered a credence good; that is, the patient may not always be able to infer quality ex ante nor observe it ex post. In this article, we study the allocation of liability among two physicians for joint damage under two liability regimes: strict liability and the negligence rule. The credence characteristic implies that the patient imperfectly detects treatment error. We find that the negligence rule is more deterrent than strict liability if the probability of detection of treatment error by the patient is high. If the probability of detection is low, both liability regimes are equivalent. An efficient allocation rule should be based on the degree of substitutability between the precaution levels of the physicians and the probability that the patient detects treatment error.
We study the optimal penalty scheme for an expert firm and a layman client against shirking in their costly interaction that helps the firm discover the unsuitable transaction, i.e. one that yields a loss for the client. The market solution to the bilateral hidden action problem fails to incentivize sufficient effort and leads to an inefficient outcome, which creates scope for government action. By contrast, private contracts obtain efficiency in an alternative framework with just the firm’s unilateral effort, highlighting the role of the client’s effort in rationalizing legal intervention. Under the unique first-best policy, the firm not only refunds the client but also pays the client’s loss to the government if the firm fails to stop a transaction that ends up being unsuitable. The client receives the refund but submits the firm’s production cost to the government. The optimal punitive penalty is their total contingent loss and is robust to private contracts. The optimal penalty generalizes to a multi-agent team by making each agent internalize all others’ contingent losses.
The treatment of a patient often implies consultations with different health care professionals. This complex health care pathway raises the issue of the regulation of health care quality. In this study, we explore how teamwork among health care professionals affects the precaution behavior of each one depending on the liability regime. To this end, we develop a theoretical model that is tested in a controlled laboratory experiment. Each health care professional chooses the precaution level invested to treat the patient. His decisions have real consequences outside the lab for charities dealing with real patients. Experimental conditions vary the number of involved health care professionals and the liability regime. Contrary to theory, we show that the negligence rule and strict liability do not provide optimal incentives to take care. The negligence rule is more efficient than strict liability to reduce the absolute deviations from optimal precaution level. Moreover, under both liability rules, teamwork decreases the health care professionals’ precaution levels.
We model the interactions between the behaviors of physicians and patients, subject to clinical and legal risks, by means of evolutionary game theory. We propose an original game in which patients may sue their physician for medical malpractice, and physicians have to choose between two alternative treatments, with different levels of benefits and risks. The safer treatment is also the less effective, therefore its provision corresponds, under the assumptions of our model, to practicing negative defensive medicine. We study the Nash equilibria, test their stability in the replicator dynamics, and analyze their welfare properties. We find that the accuracy of the judicial system plays an important role, with possible counter-intuitive effects related to legal reforms. If the court is not sufficiently accurate, defensive medicine can be favored, paradoxically, by an increase in the probability that defensive physicians are sanctioned by the court. A similar outcome can be generated also by an increase in the compensation paid to patients by physicians, when sanctioned for medical malpractice.
Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market break-down. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that either liability or verifiability yields efficiency, we find that liability has a crucial, but verifiability only a minor effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated.
Credence goods are characterized by informational asymmetries between sellers and consumers that invite fraudulent behaviour
by sellers. This article presents a natural field experiment on taxi rides in Athens, Greece, set up to measure different
types of fraud and to examine the influence of passengers' presumed information and income on the extent of fraud. We find
that passengers with inferior information about optimal routes are taken on significantly longer detours, while lack of information
on the local tariff system increases the likelihood of manipulated bills by about fifteen percentage points. Passengers' perceived
income seems to have no effect on fraud.
Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market breakdown. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that liability or verifiability yield efficiency, we find that liability has a crucial, but verifiability at best a minor, effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated. (JEL D12, D82)
The total social harm caused by everyone is often verifiable, and the harm that each actor causes is often unverifiable. In these circumstances, the authorities lack the information necessary to implement the usual liability rules or externality taxes. We propose a novel solution: hold each participant in the activity responsible for all of the excessive harm that everyone causes. By excessive harm we mean the difference between the total harm caused by all injurers and the optimal total harm. We show that the rule of total liability for excessive harm creates incentives for efficient precaution and activity level. Consequently, actual harm is not excessive and actual liability is nil. The authorities gain control over social harm without having to monitor individuals, and individuals do not have to pay damages or conform to bureaucratic regulations. This rule has many practical advantages, especially in cases involving harm to the environment.
A credence good is a product or service whose usefulness or necessity is better known to the seller than to the buyer. This information asymmetry often persists even after the credence good is consumed. I propose two new theories of expert cheating, suggesting that identifiable heterogeneities among customers can cause expert sellers to defraud their customers. According to these theories, cheating arises as a substitute for price discrimination, and experts cheat selectively. For instance, experts target high-valuation and high-cost customers. Finally, selective cheating may damage the communication of useful information from customers to experts and result in inferior services. Ordering information: This article can be ordered from https://pubs3.rand.org/cgi-bin/rje/pdf.cgi .
The economic analysis of tort law is extended to multi-party accidents with unobservable actions. Due to the requirement of no punitive damages, the problem resembles a team production problem. It is shown that asymmetry in the agents' impact on the stochastic damage function can be exploited to improve ex ante incentives. This implies departures from the proportional rule, based on the statistical information contained in the circumstances of the accident. If a noisy monitoring technology is introduced, then monitoring can add enough stochastic identifiability among injurers to restore efficiency.
Most of us need the services of an expert when our apartment's heating or our washing machine breaks down, or when our car starts to make strange noises. And for most of us, commissioning an expert to solve the problem causes concern. This concern does not disappear even after repair and payment of the bill. On the contrary, one worries about paying for a service that was not provided or receiving some unnecessary treatment. This article studies the economics underlying these worries. Under which conditions do experts have an incentive to exploit the informational problems associated with markets for diagnosis and treatment? What types of fraud exist? What are the methods and institutions for dealing with these informational problems? Under which conditions does the market provide incentives to deter fraudulent behavior? And what happens if all or some of those conditions are violated?
Distributing liability according to injurers’ relative fault produces incentives for rent-seeking (excessive care) or free-riding (insufficient care) if precautions are complements or substitutes. We show that composite sharing rules consisting of different weights of proportional and equal allocations calibrate injurers’ incentives. The optimal weight of the proportional relative to the equal allocation increases with the degree of substitutability between injurers’ precautions. As the number of injurers increases, the optimal composite rule tends to an equal allocation if precautions are pure complements or one where the most careless injurer is liable for the entire harm if precautions are pure substitutes.
This paper elaborates on the optimal negligence standard in a world where physicians choose damage prevention subject to erroneous court judgements and to the degree of supply-side cost sharing. Liability uncertainty in malpractice lawsuits leads some physicians to provide excessive prevention and others to underprovide, which results in a wel- fare loss compared to the pooled …rst-best equilibrium under perfect information. The standard that minimizes the welfare loss depends on the cost share: Under traditional, close to full cost reimbursement it is lower than the …rst-best standard, while under substantial supply-side cost sharing it increases and may exceed the …rst best.
A model of costly medical malpractice claims, based on Bayes Rule, is developed to examine the effects of physicians being liable for actual damage under a negligence rule. This model is consistent with empirical evidence concerning the pattern of claims. It is shown that compensating actual damage does not provide physicians with appropriate incentives to spend the second best optimal amount of time with patients or to treat the second best optimal number of patients. As a result, too much medical malpractice occurs relative to the second best social optimum.
This paper provides a coherent framework for classifying cases with multiple tortfeasors in relation to the efficient allocation of liability across the tortfeasors. We construct a simple model in which various tortfeasors contribute to a loss, and consider efficient liability rules under various assumptions.
Credence goods, such as car repairs or medical services, are characterized by severe informational asymmetries between sellers and consumers, leading to fraud in the form of provision of insufficient service (undertreatment), provision of unnecessary service (overtreatment) and charging too much for a given service (overcharging). Recent experimental research involving a standard (student) subject pool has examined the influence of informational and market conditions on the type and level of fraud. We investigate whether professional car mechanics - as real sellers of credence goods - react in the same way to changes in informational and institutional constraints. While we find qualitatively similar effects in the fraud dimensions of undertreatment and overcharging for both subject pools, car mechanics are significantly more prone to supplying unnecessary services in all conditions, which could be a result of decision heuristics they learned in their professional training.
This paper considers the choice between an all-or-nothing (AON) rule and a proportionate-damages (PD) rule in civil litigation. Under AON, a prevailing plaintiff receives a judgment equal to his entire damages. Under PD, damages are reduced to reflect uncertainty. For example, if the trier of fact finds that there is a 75 percent chance that the defendant is liable, the judgment would equal 75 percent of the plaintiff's damages. Using a moral hazard model that takes into account defendants' decisions to comply with legal rules, evidentiary uncertainty, and settlement, we show that AON usually maximizes the rate of compliance, although it may result in a higher level of litigation. This, in turn, provides an efficiency rationale for the ubiquity of AON in the legal system. (c) 2009 by The University of Chicago. All rights reserved..
This article examines the incentive structures that the negligence and strict liability systems provide for physicians. Other articles have analyzed the effects of these rules when an increase in care will reduce the probability of an accident. In a large class of decisions, a physician cannot reduce the probability of an accident by increasing care. He can reduce the probability of one type of accident only by increasing the probability of another. It is shown that for this class of decisions, the negligence system is more effective than strict liability in altering the decisionmaker's utility function to reflect social costs.
Physicians typically carry virtually complete malpractice insurance coverage. This contradicts standard theoretical predictions that under a negligence rule of liability there should be no demand for insurance, and insurance policies under moral hazard will contain co-payment provisions. It is argued that judicial 'errors' in defining negligence generate a demand for liability and legal defense insurance. Physician co-payment undermines the insurer's incentives for legal defense and thus induces a trade-off between loss reduction by injury prevention and by legal defense. Fee-for-service reimbursement further distorts the physician's choice between injury prevention and insurance. Implications for the deterrent function of the tort system are discussed.
We examine optimal individual and entity-level liability for negligence when expected accident costs depend on both the agent's level of expertise and the principal's level of authority. We consider these issues in the context of physician and managed care organization (MCO) liability for medical malpractice. Under current law, physicians generally are considered independent contractors and hence MCOs are not liable for negligent acts by physicians. We find that the practice of reviewing the medical decisions of physicians affects their incentives to take care, which in turn implies that it is efficient for MCOs to be held liable for the torts committed by their physicians.
This paper elaborates on the optimal negligence standard in a world where physicians choose their level of care subject to erroneous court judgements and to the degree of supply-side cost sharing. Uncertain liability in malpractice lawsuits leads physicians to provide excessive and insufficient care, which results in a loss of social welfare. The standard that maximizes welfare depends on the cost share: Under traditional, close to full cost reimbursement it is lower than the first-best level of care, while under substantial supply-side cost sharing it increases and may even exceed the first best.
This paper considers alternative approaches to dealing with causal uncertainty in strict liability tort regimes. Beginning from the philosophical literature on causing, a distinction is made between the scientific idea of causality and the legal idea of causation. This distinction is generalized to a context of causal uncertainty and associated probabilities are constructed. It is shown that a rule of proportional liability whereby the tortfeasor pays damages in proportion to the probability in causation of them having caused the damage would be socially efficient. This contrasts with the implied use of the probability in causality by the courts and in the law and economics literature on causal uncertainty.
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.
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