Findings

The Long Arm of the Law

Kevin Lewis

September 23, 2009

Homicide Trials in Classical Athens

Bryan McCannon
International Review of Law and Economics, forthcoming

Abstract:
Homicide trials in Classical Athens had a unique feature. After the initial evidence was presented the defendant was given the option to go into a self-imposed exile for life losing all protections, rights, and wealth. If the defendant did not go into exile, then the trial continued with additional arguments presented. If the judges voted to convict, the sanction of death was imposed. Given the limited set of feasible sanctions available to the Athenians, it is argued that this institution is effective as it separates some guilty from the innocent. Consequently, fewer innocent are convicted and more guilty are punished.

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Earnings Inequality and Coordination Costs: Evidence from U.S. Law Firms

Luis Garicano & Thomas Hubbard
U.S. Census Bureau Working Paper, September 2009

Abstract:
Earnings inequality has increased substantially since the 1970s. Using evidence from confidential Census data on U.S. law offices on lawyers' organization and earnings, we study the extent to which the mechanism suggested by Lucas (1978) and Rosen (1982), a scale of operations effect linking spans of control and earnings inequality, is responsible for increases in inequality. We first show that earnings inequality among lawyers increased substantially between 1977 and 1992, and that the distribution of partner-associate ratios across offices changed in ways consistent with the hypothesis that coordination costs fell during this period. We then propose a "hierarchical production function" in which output is the product of skill and time and estimate its parameters, applying insights from the equilibrium assignment literature. We find that coordination costs fell broadly and steadily during this period, so that hiring one's first associate leveraged a partner's skill by about 30% more in 1992 than 1977. We find also that changes in lawyers' hierarchical organization account for about 2/3 of the increase in earnings inequality among lawyers in the upper tail, but a much smaller share of the increase in inequality between lawyers in the upper tail and other lawyers. These findings indicate that new organizational efficiencies potentially explain increases in inequality, especially among individuals toward the top of the earnings distribution.

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Does Anyone Read the Fine Print? Testing a Law and Economics Approach to Standard Form Contracts

Yannis Bakos, Florencia Marotta-Wurgler & David Trossen
NYU Working Paper, August 2009

Abstract:
A cornerstone of the law and economics approach to standard form contracts is the "informed minority" hypothesis: in competitive markets, a minority of term-conscious buyers is enough to discipline sellers from offering unfavorable boilerplate terms. The informed minority argument is widely invoked to limit intervention in consumer transactions, but there has been little empirical investigation of its validity. We track the Internet browsing behavior of 45,091 households with respect to 66 online software companies to study the extent to which potential buyers access the standard form contract associated with software purchases, the end user license agreement. We find that only one or two out of every thousand retail software shoppers chooses to access the license agreement, and those that do spend too little time, on average, to have read more than a small portion of the license text. The results cast doubt on the relevance of the informed minority mechanism in a specific market where it has been invoked by both theorists and courts and, to the extent that comparison shopping online is relatively cheap and easy, suggest limits to the mechanism more generally.

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Defining and Measuring Judicial Activism: An Empirical Study of Judges on the United States Courts of Appeals

Corey Rayburn Yung
John Marshall Law School Working Paper, August 2009

Abstract:
Existing empirical scholarship about judicial activism has almost exclusively focused on the United States Supreme Court and actions by the judiciary that invalidate legislative, executive, and state actions. This article contends that such limitations give an extremely narrow, and potentially flawed, vision of activism and judicial decisionmaking. The Supreme Court is a less than ideal institution to study because the ever-shrinking docket of the Court creates small population sizes, the writ of certiorari process creates significant selection effects, the lack of restraints on Justices makes it difficult to identify a "correct" baseline to measure against, and the areas of law reviewed by the Court are quite limited. Studying the United States Courts of Appeals gives a fuller picture of activism, restraint, and decisionmaking among federal court judges. For the federal appellate courts, focusing on interbranch and intergovernmental actions offers little insight because cases involving such issues constitute a very small percentage of the overall docket. Instead, this article considers the activity that is the primary duty of such courts: reviewing the judgments of federal district courts. Activism, at its core, is about judges elevating their judgment above other constitutionally significant actors when a formal model of the law would predict otherwise. By analyzing how individual judges respect both deferential and non-deferential standards of review of district court judgments, this study captures, in the aggregate, a judge's privileging of his or her judgment above others. The study utilizes a newly created dataset which includes 7,516 cases and 22,548 judicial votes from 2008 cases in all eleven numbered circuits in which a standard of review was applied. The article finds that there is no statistically significant correlation between activism of judges and: (1) the political party of the appointing President; (2) the particular President who appointed the judge; (3) the ideology of the judge based upon common space scores; and (4) whether the majority of the Senate and the President were of the same party at the time of appointment. However, the study does find that individual judges and Courts of Appeals vary substantially in their levels of judicial activism in a statistically significant manner. Further, the study explores in greater detail the judicial activism measurements of four notable judges: Frank Easterbrook, Richard Posner, now Justice Sonia Sotomayor, and J. Harvie Wilkinson III.

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U.S. Attorneys and Substantial Assistance Departures: Testing for Interprosecutor Disparity

Cassia Spohn & Robert Fornango
Criminology, August 2009, Pages 813-846

Abstract:
An important and highly discretionary component of the federal sentencing guidelines is the downward departure for providing substantial assistance. Critics charge that the substantial assistance departure, which requires a motion by the prosecutor, may produce the type of unwarranted sentencing disparity that the guidelines were intended to eliminate. Research reveals, for example, that jurisdictional variations are evident in the use of substance assistance departures (Johnson, Ulmer, and Kramer, 2008; Nagel and Schulhofer, 1992), and that the likelihood of receiving the departure is affected by legally irrelevant offender characteristics, which include race, ethnicity, and gender (Mustard, 2001). The purpose of this article is to extend this research by exploring the degree to which decisions regarding substantial assistance departures vary across prosecutors. Using data on offenders sentenced in three U.S. district courts and a multilevel modeling strategy, we investigate whether interprosecutor disparity exists in the likelihood of substantial assistance departures and in the criteria that prosecutors use in deciding whether to file a motion for a substantial assistance departure. Findings indicate that significant interprosecutor variation remains after taking into account offender characteristics, case characteristics, and the district in which the case is adjudicated.

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Malpractice litigation and medical costs in the United States

Brandon Roberts & Irving Hoch
Health Economics, forthcoming

Abstract:
This paper examines the relationship of medical malpractice litigation and medical costs in the United States. We relate medical malpractice settlements to medical costs for 190 metro and non-metro areas in the United States over a 5-year period and find that litigation is positively and significantly related to medical costs. Using a panel data set and a fixed-effects specification, the estimates indicate that malpractice litigation accounts for roughly 2-10% of medical expenditures, with the impact exceeding the dollar amount of settlements.

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Noneconomic Damage Caps and Medical Malpractice Claim Frequency: A Policy Endogeneity Approach

Christine Piette Durrance
Journal of Law, Economics, and Organization, forthcoming

Abstract:
Medical malpractice has received much attention in the media with highly publicized jury awards and reported consequences of excessive litigation. Health care and medical malpractice remain a prominent issue, especially in the current political climate. Policy endogeneity, however, plagues most analyses of various federal, state, or local policies. In this article, I analyze the effect of noneconomic damage caps on the frequency of positive payment medical malpractice claims, recognizing that these laws are likely endogenous. I construct a unique instrument using past and current values of state political composition and other factors. In contrast to previous literature, I find no evidence that caps on noneconomic damages are associated with a reduction in medical malpractice positive payment claim frequency.

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Valuation of Quality of Life Losses Associated with Nonfatal Injury: Insights from Jury Verdict Data

Deborah Vaughn Aiken & William Zamula
Review of Law & Economics, 2009

Abstract:
Evaluations of the societal burden associated with injury typically employ a cost of illness (COI) framework, focusing on direct costs, such as medical costs, and indirect costs, such as reduced productivity. However, nonfatal injuries that have long-lasting or permanent consequences can significantly reduce the quality of life for those affected. While COI evaluations are useful in demonstrating the economic burden attributable to injury, they typically do not cover quality of life losses. This study estimates the value of quality of life losses associated with consumer product injuries. We use ex post data based on jury awards in product liability lawsuits involving nonfatal product-related injuries. By combining data on monetary compensation awarded in these cases with estimates of the reduction in quality adjusted life years (QALYs) due to the injury suffered, we are able to estimate the component awarded for quality of life losses. Our findings suggest that these awards are rational and systematic, and that the most significant determinant appears to be injury severity, measured as the QALY loss. The values for life and quality of life losses implied by jury awards appear reasonable (if not somewhat low) when compared to the values obtained in the value of a statistical life literature.

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Malpractice Standards of Care and Regional Variations in Physician Practice Styles

Michael Frakes
Harvard Working Paper, August 2009

Abstract:
Physician practices vary in a striking and persistent manner across different regions of the United States. In this paper, I explore the association between regional variations in physician behavior and the geographical scope of the standards of care to which physicians are held in malpractice actions. Malpractice laws that require physicians to comply with the standards set by local physicians may help to perpetuate divergent practice patterns. The adoption of laws requiring physicians to comply with national standards of care, on the other hand, may lessen regional disparities by inducing physicians to practice closer to the national mean. Over time, most states have come to modify their malpractice laws in this latter direction. Drawing on this rich set of legal variations and using data on physician behavior from the 1977 — 2005 National Hospital Discharge Survey (NHDS) files, I test for evidence of convergence in state utilization rates towards national rates as states abandon the use of "locality" rules in favor of national standard-of-care laws. Focusing on obstetric practices, I document robust evidence of convergence in cesarean section utilization, whereby as much as 40 — 60% of the gap between state and national cesarean rates is closed upon the adoption of a national-standard rule.

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The Impact of the 'Duty to Settle' on Settlement: Evidence from Texas

David Hyman, Bernard Black & Charles Silver
UT Austin Working Paper, August 2009

Abstract:
All insurance has coverage limits, and insurers usually control whether a case is settled or tried. If the insurer rejects a within-limits settlement offer, the risk of an above-limits verdict is borne by the insured. In response, virtually every state has enacted a "duty to settle," which creates incentives for plaintiffs to make at-limits offers and for insurers to accept those offers where expected damages exceed limits. We study how the duty to settle affects claim duration and defense costs using detailed closed claims data from Texas for 1988-2005. We find that medical malpractice cases against physicians that settle at limits close about five months faster than similar below-limits cases — a 20% reduction in time from suit filing to settlement, controlling for payout, type of harm, and other observable factors. At-limits cases also have substantially lower defense costs, controlling for case duration and complexity. It is difficult to obtain an at-limits payout without a lawyer. When there is an above-limits payout, it is primarily paid by the insurer. We find consistent results for other types of personal injury cases.

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Contracting Out of Liability: Medical Malpractice and the Cost of Choice

Jennifer Arlen
NYU Working Paper, August 2009

Abstract:
Contractual liability proponents claim that states can best reform malpractice liability by allowing patients to contract over, and out of, liability. Proponents claim that informed patients would be better off if allowed to take care of themselves through contract than they would be if states reformed malpractice liability directly because patients get as much benefit from contractual liability as from state-imposed liability, and thus can use contracting to maximize their welfare. This article demonstrates that this claim is incorrect because malpractice liability contracts are inefficient, whether executed with individual physicians or with health insurers. As a result, patients who value the increased safety induced by state-imposed malpractice liability could not get the same deterrence benefits, at the same cost, by imposing liability by contract. Patients cannot use contractual liability replicate state-imposed malpractice liability because the two forms of liability are fundamentally different. Traditional malpractice liability is imposed automatically, collectively (by all patients on all providers), and across all time periods. By contrast, contractual liability only governs specific patients and providers, as of the moment of contracting, and only by patient request. These changes matter because collective, multi-period liability can be used to induce medical providers to make safety investments that benefit all patients, now and in the future. By contrast, patients cannot use their right to impose liability through individual contracts to replicate these incentives. In addition, all else equal, patients also would pay more for the right to impose liability by contract than they would for traditional malpractice liability because providers and insurers offering liability know that patients who seek it on average are more expensive. The additional premium would hurt average patients who wanted liability. Finally, informed patients could be hurt by contracting over the standard of care because they would contract for more variation than is cost-effective for a medical system which needs to standardize care to facilitate training, supervision, research, and coordination across providers. Thus, instead of enhancing all patients' choices, contracting over liability would hurt patients who benefit from state-imposed liability by forcing them into a less valuable and more expensive form of liability that creates incentives for them to waive liability when it is not optimal for them to do so.


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