Abstract

http://ssrn.com/abstract=1883691
 


 



Tort Liability and the Market for Prescription Drugs


Eric Helland


Claremont McKenna College - Robert Day School of Economics and Finance; RAND

Darius Lakdawalla


RAND Corporation; National Bureau of Economic Research (NBER)

Anup Malani


University of Chicago - Law School; University of Chicago Pritzker School of Medicine; Resources for the Future; National Bureau of Economic Research (NBER)

Seth A. Seabury


Keck School of Medicine, University of Southern California

July 6, 2011


Abstract:     
Nearly all the empirical literature on tort liability in the healthcare sector focuses on physicians. Yet both drug companies and physicians lose roughly the same portion of revenue (2 percent) to liability expenses.Moreover, the health care system’s expenditures on drugs are rising nearly twice as fast as expenditures on physician and hospital care. In this paper we model and estimate the welfare effects of failure‐to‐warn suits, the most common type of tort litigation involving drug companies. We find that tort liability ‐‐ proxied by punitive damage caps ‐‐ increases drug prices but that it also reduces side effects. Moreover, we find that tort liability increases the equilibrium quantity of drug sales. This suggests that liability not only increases cost and reduces supply, but also increases expected safety and thus demand. Together the increase in equilibrium quantity and reduction in side effects suggests that tort liability improves social welfare.

Number of Pages in PDF File: 35

Keywords: Product Liability

JEL Classification: K13

working papers series


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Date posted: July 12, 2011  

Suggested Citation

Helland, Eric and Lakdawalla, Darius and Malani, Anup and Seabury, Seth A., Tort Liability and the Market for Prescription Drugs (July 6, 2011). Available at SSRN: http://ssrn.com/abstract=1883691 or http://dx.doi.org/10.2139/ssrn.1883691

Contact Information

Eric A. Helland (Contact Author)
Claremont McKenna College - Robert Day School of Economics and Finance ( email )
500 E. Ninth St.
Claremont, CA 91711-6420
United States
909-607-7275 (Phone)
909-621-8243 (Fax)
RAND ( email )
1776 Main Street
Santa Monica, CA
United States
Darius Lakdawalla
RAND Corporation ( email )
P.O. Box 2138
1700 Main Street
Santa Monica, CA 90407-2138
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Anup Malani
University of Chicago - Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
773-702-9602 (Phone)
773-702-0730 (Fax)
HOME PAGE: http://www.law.uchicago.edu/faculty/malani/
University of Chicago Pritzker School of Medicine
Chicago, IL 60637
United States
Resources for the Future
1616 P Street, NW
Washington, DC 20036
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Seth A. Seabury
Keck School of Medicine, University of Southern California ( email )
Los Angeles, CA 90089
United States
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