Bargaining with Optimism:A Structural Analysis of Medical Malpractice Litigation
Antonio Merlo and Xun Tang
Department of Economics
Rice University
August 3, 2015
Abstract
We study identi
cation and estimation of a structural model of bargaining with optimism where players have heterogeneous beliefs about the
nal resolution of a dispute if they fail to reach an agreement. We show the distribution of the playersbeliefs and the stochastic bargaining surplus are nonparametrically identi
ed from the probability of reaching an agreement and the distribution of transfers in the
nal resolution of the dispute. We use a
Maximum Simulated Likelihood approach to estimate the beliefs of doctors and patients in medical malpractice disputes in Florida during the 1980s and 1990s. We
nd strong evidence that beliefs for both parties vary with the severity of the injury and the quali
cation of the doctor named in the lawsuit, even though these characteristics are statistically insigni
cant in explaining whether the court rules in favor of the plaintff or of the defendant. We also
quantify the reduction in settlement amounts that would result from the introduction of a (counterfactual) policy that imposes caps on the total compensation for plaintiffs.
Key words: Bargaining, optimism, nonparametric identi
cation, medical malpractice litigation
