Abstract
Abstract A model of costly medical malpractice claims, based on Bayes Rule, is developed to examine the effects of physicians being liable for actual damage under a negligence rule. This model is consistent with empirical evidence concerning the pattern of claims. It is shown that compensating actual damage does not provide physicians with appropriate incentives to spend the second best optimal amount of time with patients or to treat the second best optimal number of patients. As a result, too much medical malpractice occurs relative to the second best social optimum.
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