Three essays in microeconomics: Liability, litigation, insurance, and incentives; optional no-fault insurance for medical malpractice; and a first order approach to simultaneous moral hazard and adverse selection

The first essay examines the impact of liability insurance on litigation and the incentives to reduce negligence. When courts do not make errors, competitive insurers will be able to fully insure all defendants despite the potential for moral hazard and adverse selection. When the court's penalty structure is taken as fixed, the amount of negligence with insurance is the same as would be chosen by an industry planner who maximizes the joint surplus of insurers and physicians, and it may be higher than the level of negligence that would prevail in the absence of insurance. The negligence standard is contrasted to strict liability, in which there will be partial insurance, higher penalties may be required to implement a given level of care, and all suits will be settled. When courts make errors, incentives to be careful are reduced; with Type II errors only, careful physicians cannot be fully insured. The second essay contrasts two systems for compensating patients who have suffered adverse consequences from medical treatment: the negligence standard and optional no-fault insurance (ONFI). If the planner can implement the chosen level of effort in an equilibrium in which all claims are settled, then, when patients are risk neutral, ONFI is Pareto efficient. Risk-averse patients may not be willing to pay for ONFI, since it may overcompensate patients with low damages and undercompensate those with high damages. It may not be feasible for all claims to settle under ONFI, and this results in more trials and more court costs with ONFI than without it. Risk-neutral patients would prefer that ONFI not be adopted in this case; risk-averse patients may prefer ONFI if there are few patients with high damages. The third essay considers a first-order approach to simultaneous moral hazard and adverse selection in which an infinite number of incentive compatibility constraints is replaced with the corresponding first order conditions. Sufficient conditions for the validity of this approach are given for the two-agent case. The optimal incentive scheme will be a compromise between provision of incentives for the intended agent and provisions of disincentives for the other agents.