| This study examines how defendant's decisions in medical malpractice litigation are formed when reputation effects occur as a result of liability, and when physicians have malpractice insurance. The standard model of medical malpractice resolution was expanded to account for the presence of both. The analysis proceeded in three stages. First, the defendant's utility function was broadened to allow a role for reputation, but not liability insurance. Second, the basic model was expanded to account for the presence of liability insurance, while ignoring possible reputation effects. Finally, both extensions were incorporated simultaneously. At each stage, the analysis examined how the modifications to the model influenced the defendant's “maximum offer”, i.e., the maximum amount for which he would agree to settle the case.; It was shown that effects of reputation on the defendant's maximum offer are not always to encourage settlement (which is the conventional wisdom). Rather, the maximum offer no longer lies in the interval between the expected trial award and the maximum potential award at trial, as in the basic model. The maximum offer may even be negative in the presence of reputation effects, which may explain why some cases are not settled and proceed to trial instead. These findings were shown to hold for all models which incorporated reputation effects.; It was also shown that liability insurance generally has an ambiguous effect on the defendant's maximum offer. Higher settlements do not necessarily result when defendants are insured, in contrast to conventional wisdom in this area. However, insurance does affect the interval for the defendant's maximum offer, causing it to differ from the interval in the basic model. The analysis also showed that malpractice insurance alone could not result in negative maximum offers, unlike reputation effects. This suggests that it is reputation effects and not malpractice insurance, which causes some cases not dropped by plaintiff to proceed to trial. |
