Law & Econ Prof Blog

Baker's Medical Malpractice Myth

I've just finished reading a book that I cannot recommend highly enough -- Tom Baker's The Medical Malpractice Myth (2005).  It is beautifully written and the best summary of the literature on medical malpractice that I have ever read.  Tom's summaries of the academic literature on such topics as the incidence of adverse medical outcomes, on the pattern of medical malpractice insurance rates, whether doctors practice defensive medicine, and what reforms make sense are simply marvelous.  As Tom says repeatedly, "[t]he real medical malpractice problem is medical malpractice.  It is not pretty to say, but doctors and nurses make preventable mistakes that kill more people in the United States every year than workplace and automobile accidents combined.  ...  The problem is not that there are too many claims; the problem is that there are too few."  (157) 

The really deep puzzle about all this is why, given the overwhelming evidence that there is no medical malpractice litigation crisis, legislators, the President, the AMA, and others believe that there is.  Honestly, I can't figure it out.  Is this just bare-knuckles interest-group politics?  Is it willful ignorance? 

Be sure not to miss this spectacular piece of work.  The story of how the American Society of Anesthesiologists reformed themselves so as to reduce the incidents of preventable adverse outcomes and saw, as a result, a decrease in their malpractice insurance premiums is as instructive as anything I've ever read in this area. 

TSU (Thomas S. Ulen) 

Recent Work on Empirical Bankrupcty

Professor Larry Weiss has asked me to post the following annnouncements regarding some of his recent papers (one of which is to be presented at the upcoming Amercan Law and Economics Association meetings). Here they are:

1. For a review of the methodological problems of prediction bankruptcy using financial ratios, take a look at my paper with Vedran Capkun (on SSRN):

The Impact of Incorporating the Cost of Errors into Bankruptcy Prediction Models
Abstract
The current methodology to use and evaluate default and bankruptcy prediction models is to determine their precision - the percentage of firms predicted correctly. In this study we develop a framework for incorporating Type I (the amount lost from lending to a firm which goes bankrupt) and Type II (the opportunity cost of not lending to a firm which does not go bankrupt) error costs into the prediction models and their evaluation.
Our results indicate that a lending model which accounts for the cost of errors and firm size yields higher profits than a model relying only on precision. This also supports our hypothesis that the usefulness of prediction models cannot be fully assessed independently of the costs of both types of forecast errors.


2. For a review of changes in the payouts in major bankruptcies, take a look at my paper with Vedran Capkun (on SSRN):
Bankruptcy Resolution: Priority of Claims with the Secured Creditor in Control
Abstract
We present new evidence on the violation of priority of claims in bankruptcy using a sample of 222 firms that filed for Chapter 11 from 1993 through 2004. Our study reveals a dramatic reduction in violations compared to research on prior periods. These results are consistent with changes in court practices and laws transferring power to the secured creditors over our sample period.  We also find an increase in the time from the date of filing to plan confirmation.  Apparently, the potential benefits creditors receive from increased control over the process are mitigated by increased costs from a longer process.

3. To understand how putting the secured creditor in charge of bankruptcy cases impacts managers actions, take a look at my paper with Barry Adler and Vedran Capkun (on SSRN):
Bankruptcy Initiation In The New Era of Chapter 11
Abstract
The bankruptcy act of 1978 placed corporate managers (as debtor in possession) in control of the bankruptcy process. Between 2000 and 2001 managers lost such control to creditors. This study examines financial ratios of firms filing for bankruptcy between 1993 and 2004 and tests the hypothesis that the change from manager to creditor control created or exacerbated managerial (and dominant creditor) incentive to delay bankruptcy filing. We find a clear deterioration in the financial conditions of firms filing after 2001, which suggests that managers may now postpone filings to avoid creditor control. We also observe patterns of operating losses and liquidations that suggest adverse economic consequences from such delay.

4. To see what happens to managers and board members when firms go bankrupt, take a look at my paper with Vedran Capkun (on SSRN):
Financial Distress and Corporate Control
Abstract
We examine the replacement rates of directors and executives in 63 firms filing for bankruptcy during the 1995-2002 period. We find that over 76% of directors and executives are replaced in the four year period from the year prior to the bankruptcy filing through three years after.  These rates are higher than in prior research. This is consistent with changes in bankruptcy procedures and practice (i.e. the increase secured creditor control over the process due to both DIP financing and changes in the Uniform Commercial Code) having a significant impact on the corporate governance of firms in financial distress.

Empirical Bankruptcy--Guest Editor

I am pleased to report that Professor Larry Weiss has agreed to be a contributing editor this site, especially with respect to empirical stidues in bankruptcy. Professor Weiss is a Professor of Acconting and Finance and holds a doctorate degree in from Harvard. He has previously taught at MIT. I have been fortunate enough to collaborate with him on several projects over the years.

International Economic Law

I happened to glance at the program for the upcoming American Law and Economics Meetings for 2006, and was pleased to see that bankruptcy issues feature prominently on the program. There also appear to be papers addressing empirical matters (Ithink the paper on bankruptcy at the above-mentioned program by Adler et al) is such a piece.

But I did not see any paper listed that purports to deal, either theoretically or empirically with international economic or financial matters. In examining the books that offer learning tools for would- be scholars of or readers in law and economics (there are a couple of new ones in the last two or three years), I did not see one that included sections or chapters on international economics/finance and their application to legal issues. Perhaps, someone will comment on whether this is because there just are not that many legal issues of interest that require some knowledge of international economics and finance or some other reason.   

Introduction to the Law & Economics Blog

We first extend our thanks and appreciation to Paul Caron of the University of Cincinnati Law School for giving us the opportunity to edit this web-log. Several legal web-logs are already operational, both in Professor Caron’s network and in others, and some even deal with law and economics. Colleagues we have talked with, as well as students, report on the usefulness of a well-produced web-log in putting forth new ideas, concepts, theories and views, reporting results of work and in exchanging comments on current work in a matter of hours or days, instead of months or even years, as would be usual for journal publications. Many an idea for new scholarship has sprung from web-logs and timely and free-standing entries in web-logs.

The web-log that we have been fortunate enough to edit and produce is entitled “Law and Economics.” It would be appropriate in this introductory entry to clarify the scope of this particular web-log. If our ideas border on topics selected by editors of other web-logs, we hasten to assure you that we have no intention of usurping other areas or engaging in unhealthy competition.

Our notion of this particular web-log is not limited to theoretical economic analysis of law, although that area is certainly encompassed in this web journal. We also intend to include contributions dealing with (a) Law and Finance, (b) International Economic and Monetary Law, (c) Law and Socio-Economics, and most certainly (d) Applications of empirical methods to any area of the law and public policy. Contributions drawing upon other related areas, such as International Political Economy, Public Choice, Political Economy, and Industrial Organization, are also included. In sum, the scope of this web-log is very broad. The only limitation is that there be some recognizable and relevant interface between economic tools and methodology and legal or public policy issues, as these terms are commonly understood.

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