Empirical legal studies has transformed economic analysis of malpractice liability. Until recently, economic analysis of malpractice liability has been based on the traditional model of accidents. This model supports the conclusion that malpractice liability may not be needed if health insurers, not physicians, bear treatment costs. Moreover, this analysis implies that even when liability is welfare-enhancing, it need not be mandatory if patients are informed about the costs and benefits of liability. Empirical analysis of medical errors reveals that we cannot rely on the simple model of accidents to analyze optimal malpractice liability because patient safety depends on two different care decisions, only one of which is properly captured by the traditional model. Expanding the model to account for the two distinct ways that physicians protect patients reveals that malpractice liability is needed even when doctors want to select the right treatment. It also reveals why contractual malpractice liability is inefficient even when patients are informed about the costs and benefits of liability.
Arlen, Jennifer, Reality Check: How Malpractice Facts Changed Malpractice Liability Theory (September 2013), 2011, Empirical Studies Of Judicial Systems, Yun-chien Chang ed, 2013; NYU Law and Economics Research Paper No 13-12; NYU School of Law, Public Law Research Paper No 13-23.