Delivering bad news: Market responses to negligence

David Dranove*, Subramaniam Ramanarayanan, Yasutora Watanabe

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

11 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1-25
Number of pages25
JournalJournal of Law and Economics
Volume55
Issue number1
DOIs
StatePublished - Jan 1 2012

ASJC Scopus subject areas

  • Economics and Econometrics
  • Law

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