Settlement out of Court: The Disposition of Medical Malpractice Claims

Abstract

THE main purpose of this paper is to present empirical estimates of a model of the disposition of claims through the courts. Landes, Gould, Posner, and others have developed a theoretical model of the disposition process, in which the decision to settle and the size of settlement depend on the defendant's maximum offer (expected award at verdict plus litigation costs) relative to the plaintiff's minimum ask (expected award at verdict minus litigation costs).' Variants of this model have been applied in several contexts, but so far it has not been tested empirically with data on individual claims.2 The obstacles to estimation by standard econometric techniques are twofold. First, the hypothesized determinants of the outcome-the potential verdict, ask, offer, and litigation costs-are all unobserved in the data available. Second, if the theory is correct, claims closed at each stage of disposition are not random samples but are "selfselected" on the basis of those case characteristics whose effect we wish to measure. Therefore, analysis of the observed outcome-size and probability of payment to the plaintiff, at verdict and in out-of-court settlement-cannot be generalized to the universe of claims as a whole. Param-