Download this Paper Open PDF in Browser

Tort Liability and the Market for Prescription Drugs

35 Pages Posted: 12 Jul 2011  

Eric Helland

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

Darius N. Lakdawalla

University of Southern California - Schaeffer Center for Health Policy and Economics; 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

University of Southern California - Keck School of Medicine

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

Keywords: Product Liability

JEL Classification: K13

Suggested Citation

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

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 N. Lakdawalla

University of Southern California - Schaeffer Center for Health Policy and Economics ( email )

635 Downey Way
Los Angeles, CA 90089-3333
United States

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

University of Southern California - Keck School of Medicine ( email )

Los Angeles, CA 90089
United States

Paper statistics

Downloads
104
Rank
155,409
Abstract Views
1,192