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Delivering Bad News: Market Responses to Negligence

Author

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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.

Suggested Citation

  • David Dranove & Subramaniam Ramanarayanan & Yasutora Watanabe, 2012. "Delivering Bad News: Market Responses to Negligence," Journal of Law and Economics, University of Chicago Press, vol. 55(1), pages 1-25.
  • Handle: RePEc:ucp:jlawec:doi:10.1086/661227
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    References listed on IDEAS

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    1. Daniel P. Kessler & Mark McClellan, 1996. "Do Doctors Practice Defensive Medicine?," NBER Working Papers 5466, National Bureau of Economic Research, Inc.
    2. Daniel Kessler & Mark McClellan, 1996. "Do Doctors Practice Defensive Medicine?," The Quarterly Journal of Economics, Oxford University Press, vol. 111(2), pages 353-390.
    3. Janet Currie & W. Bentley MacLeod, 2008. "First Do No Harm? Tort Reform and Birth Outcomes," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 795-830.
    4. Viscusi, W Kip & Hersch, Joni, 1990. "The Market Response to Product Safety Litigation," Journal of Regulatory Economics, Springer, vol. 2(3), pages 215-230, September.
    5. David Dranove & Ginger Zhe Jin, 2010. "Quality Disclosure and Certification: Theory and Practice," Journal of Economic Literature, American Economic Association, vol. 48(4), pages 935-963, December.
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    Cited by:

    1. Panthöfer, S., 2016. "Do Doctors Prescribe Antibiotics Out of Fear of Malpractice?," Health, Econometrics and Data Group (HEDG) Working Papers 16/31, HEDG, c/o Department of Economics, University of York.
    2. 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.
    3. repec:eee:respol:v:46:y:2017:i:9:p:1552-1569 is not listed on IDEAS
    4. Helland, Eric & Seabury, Seth A., 2015. "Tort reform and physician labor supply: A review of the evidence," International Review of Law and Economics, Elsevier, vol. 42(C), pages 192-202.
    5. Azoulay, Pierre & Bonatti, Alessandro & Krieger, Joshua L., 2017. "The career effects of scandal: Evidence from scientific retractions," Research Policy, Elsevier, vol. 46(9), pages 1552-1569.
    6. Lint Barrage & Eric Chyn & Justine Hastings, 2014. "Advertising and Environmental Stewardship: Evidence from the BP Oil Spill," NBER Working Papers 19838, National Bureau of Economic Research, Inc.
    7. Andrew J. Epstein & Sean Nicholson & David A. Asch, 2016. "The Production of and Market for New Physicians’ Skill," American Journal of Health Economics, MIT Press, vol. 2(1), pages 41-65, January.
    8. Eric Helland & Anupam B. Jena & Dan P. Ly & Seth A. Seabury, 2016. "Self-insuring against Liability Risk: Evidence from Physician Home Values in States with Unlimited Homestead Exemptions," NBER Working Papers 22031, National Bureau of Economic Research, Inc.
    9. Avraham, Ronen & Schanzenbach, Max, 2015. "The impact of tort reform on intensity of treatment: Evidence from heart patients," Journal of Health Economics, Elsevier, vol. 39(C), pages 273-288.
    10. Ginger Zhe Jin & Benjamin Jones & Susan Feng Lu & Brian Uzzi, 2013. "The Reverse Matthew Effect: Catastrophe and Consequence in Scientific Teams," NBER Working Papers 19489, National Bureau of Economic Research, Inc.

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