Medical Malpractice: The Optimal Negligence Standard under Supply-side Cost Sharing

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 \u85rst-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 \u85rst-best standard, while under substantial supply-side cost sharing it increases and may exceed the \u85rst best. JEL classi\u85cation: I11, K1