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Profits, Reputation, and the Risk of Medical Malpractice Liability

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  • Na-Eun Cho

    (Department of Business Administration, College of Business Administration, Hongik University, Mapo-gu, Seoul, 04066, South Korea)

  • Yue Maggie Zhou

    (Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

Abstract

We investigate the classic strategy choice between low cost and high quality when quality is not directly observable and legal liability about quality is uncertain. In addition, we investigate how for-profit and nonprofit organizations differ in their responses to a changing risk of quality liability. Our theoretical analysis predicts that nonprofit organizations, because of their lesser dependence on profits and greater dependence on support from donors and local communities based on perceived quality, will adjust their investment in quality more aggressively than for-profit organizations in response to exogenous changes in the risk of quality liability. This difference in responsiveness will be greater for organizations with better reputations for quality. We find support for these predictions using data on hospital medical expenditures, state medical malpractice awards, and tort reforms in the United States for 1997–2006.

Suggested Citation

  • Na-Eun Cho & Yue Maggie Zhou, 2021. "Profits, Reputation, and the Risk of Medical Malpractice Liability," Strategy Science, INFORMS, vol. 6(3), pages 228-243, September.
    • Handle: RePEc:inm:orstsc:v:6:y:2021:i:3:p:228-243
    DOI: 10.1287/stsc.2021.0128
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    References listed on IDEAS

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