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Bargaining with Optimism: A Structural Analysis of Medical Malpractice Litigation

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  • Merlo, Antonio

    (Rice University)

  • Tang, Xun

    (Rice University)

Abstract

We study identification and estimation of a structural model of bargaining with optimism where players have heterogeneous beliefs about the final resolution of a dispute if they fail to reach an agreement. We show the distribution of the players' beliefs and the stochastic bargaining surplus are nonparametrically identified from the probability of reaching an agreement and the distribution of transfers in the final resolution of the dispute. We use a Maximum Simulated Likelihood approach to estimate the beliefs of doctors and patients in medical malpractice disputes in Florida during the 1980s and 1990s. We find strong evidence that beliefs for both parties vary with the severity of the injury and the qualification of the doctor named in the lawsuit, even though these characteristics are statistically insignificant in explaining whether the court rules in favor of the plaintiff or of the defendant. We also quantify the reduction in settlement amounts that would result from the introduction of a (counterfactual) policy that imposes caps on the total compensation for plaintiffs.

Suggested Citation

  • Merlo, Antonio & Tang, Xun, 2015. "Bargaining with Optimism: A Structural Analysis of Medical Malpractice Litigation," Working Papers 15-005, Rice University, Department of Economics.
    • Handle: RePEc:ecl:riceco:15-005
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    File URL: http://economics.rice.edu/rise/working-papers/bargaining-optimism-structural-analysis-medical-malpractice-litigation
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    References listed on IDEAS

    as
    1. Muhamet Yildiz, 2003. "Bargaining without a Common Prior-An Immediate Agreement Theorem," Econometrica, Econometric Society, vol. 71(3), pages 793-811, May.
    2. Merlo, Antonio & Wilson, Charles A, 1995. "A Stochastic Model of Sequential Bargaining with Complete Information," Econometrica, Econometric Society, vol. 63(2), pages 371-399, March.
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    6. Hu, Yingyao & McAdams, David & Shum, Matthew, 2013. "Identification of first-price auctions with non-separable unobserved heterogeneity," Journal of Econometrics, Elsevier, vol. 174(2), pages 186-193.
    7. Antonio Merlo & Xun Tang, 2012. "Identification and Estimation of Stochastic Bargaining Models," Econometrica, Econometric Society, vol. 80(4), pages 1563-1604, July.
    8. Holger Sieg, 2000. "Estimating a Bargaining Model with Asymmetric Information: Evidence from Medical Malpractice Disputes," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1006-1021, October.
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