Exploring the Nexus Between Certainty in Injury Compensation and Treatment Selection

Abstract: We study how legal and financial incentives affect medical decisions. Using patient-level data, we identify the effect of a change in medical liability pressure by exploiting the geographical distribution of hospitals across court districts, where some districts increase the certainty of expected damages per injury while others do not. Using a difference in difference identification, we show that as certainty increases, c-sections increase by 17%, with no improvement in the health outcomes of either mothers or newborns.  The increase is higher for hospitals with lower quality, that are farther from the monitoring activity of consumer associations, that are governed by inefficient court districts, that face lower expected damages, and that are paid more per c-section.