Bargaining with Optimism: Identication and Estimation of a Model of Medical Malpractice Litigation

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 that the distribution of beliefs of both parties and the stochastic bargaining surplus are nonparametrically identi…ed from the probability of settlement and the distribution of transfers in the …nal resolution. Using data from medical malpractice lawsuits …led in the State of Florida between 1984 and 1999, we apply our model to estimate the beliefs of doctors and patients and the distribution of potential compensation. We …nd that, on average, patients are more optimistic and doctors more pessimistic when the severity of injury due to the alleged malpractice is higher, and that the joint optimism of both parties diminishes with the level of severity. We also quantify the increase in settlement probability and the reduction in accepted settlement o¤ers that would result from a (counterfactual) policy which imposes caps on the total compensation for plainti¤s. Key words: Bargaining, optimism, litigation costs, nonparametric identi…cation, medical malpractice litigation