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Delivering Bad News: Market Responses to Negligence

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  • David Dranove
  • Subramaniam Ramanarayanan
  • Yasutora Watanabe

Abstract

One of the goals of the legal liability system is to ensure that sellers provide appropriate care. Reputation effects may also deter negligence. The little available research evidence suggests that reputation effects are minimal, however. We develop a theory tailored to an environment, such as medicine, in which sellers are of heterogeneous quality and face two types of demand—private consumers who exhibit downward-sloping demand (for example, private health insurance) and government consumers who exhibit perfectly elastic demand at a fixed price (for example, Medicaid insurance). The theory predicts that high-quality sellers who suffer reputation losses will see their caseloads shift from private to government patients, while low-quality sellers will lose government patients and may gain private patients. Combining individual patient-level data from Florida for the years 1994–2003 with physician-level litigation data, we find evidence that physicians experience reputation effects that are consistent with the theory.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/661227
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File URL: http://www.jstor.org/stable/full/10.1086/661227
Download Restriction: Access to the online full text or PDF requires a subscription.

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Bibliographic Info

Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

Volume (Year): 55 (2012)
Issue (Month): 1 ()
Pages: 1 - 25

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Handle: RePEc:ucp:jlawec:doi:10.1086/661227

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Web page: http://www.journals.uchicago.edu/JLE/

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Cited by:
  1. Shurtz, Ity, 2013. "The impact of medical errors on physician behavior: Evidence from malpractice litigation," Journal of Health Economics, Elsevier, vol. 32(2), pages 331-340.
  2. Lint Barrage & Eric Chyn & Justine Hastings, 2014. "Advertising, Reputation, and Environmental Stewardship: Evidence from the BP Oil Spill," NBER Working Papers 19838, National Bureau of Economic Research, Inc.

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