Self-Insuring Against Liability Risk: Evidence from Physician Home Values in States with Unlimited Homestead Exemptions

53 Pages Posted: 1 Mar 2016 Last revised: 16 Mar 2016

See all articles by Eric Helland

Eric Helland

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

Anupam B. Jena

Harvard University; National Bureau of Economic Research (NBER)

Dan Ly

Harvard University

Seth A. Seabury

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

Date Written: February 2016

Abstract

When faced with financial uncertainty, rational agents have incentives to take steps ex ante to reduce the probability (self-protection) or size (self-insurance) of a loss. However, in the case of liability risk, especially physician responses to malpractice risk, most empirical analyses have focused exclusively on measuring self-protection. This paper studies whether physicians invest in self-insurance by exploring how they respond to policies that allow them to lower the financial cost of malpractice liability. Specifically, we test whether physicians exploit provisions of bankruptcy laws and adjust the value of their home purchases to protect assets from liability claims exceeding their malpractice policy limits. We find that in states with unlimited “homestead” exceptions—provisions of state law that protect home equity when individuals file for bankruptcy—physicians invest 13% more in the value of their homes compared to what they would have invested in the absence of an exemption, whereas no such effect is true for other professionals of similar family income, family size, demographics, and city of residence. Additionally, the response of physicians to unlimited homestead exemptions is larger in areas with higher liability risk, where physicians would have greater incentive to insure against financial risks. Our findings suggest that physicians take financially costly decisions to protect themselves from uninsured malpractice risk, implying more generally that individuals self-insure against liability risk when insurance markets are incomplete.

Suggested Citation

Helland, Eric A. and Jena, Anupam B. and Ly, Dan and Seabury, Seth A., Self-Insuring Against Liability Risk: Evidence from Physician Home Values in States with Unlimited Homestead Exemptions (February 2016). NBER Working Paper No. w22031. Available at SSRN: https://ssrn.com/abstract=2739557

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 )

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Anupam B. Jena

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Dan Ly

Harvard University

1875 Cambridge Street
Cambridge, MA 02138
United States

Seth A. Seabury

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

2250 Alcazar Street
Los Angeles, CA 90089
United States

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

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

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