Currently in many countries, a physician who commits malpractice faces a financial cost either full liability for court-awarded monetary damages or, if insured, an increase in future malpractice liability insurance premiums. An important question is whether the deterrence provided by the existing malpractice system is at its socially efficient level, i.e., the level patients would be willing to pay for. To let patients express their willingness-to-pay, many scholars propose allowing patients (either directly or via their health insurers) an option to determine monetary damages by contract, which they are not permitted to do under current law. It is argued that consumers cannot be worse off under such a policy, because they can still opt for the status quo, i.e. having a court determine damages. This dissertation analyzes the economic-efficiency properties of such a policy-reform proposal, taking into account special features of the medical malpractice context.;The first chapter reviews the relevant literature, highlighting important results from the theory of optimal contracting. Additionally we discuss some articles that make a case for allowing patient-physician contracting for damages.;The second chapter presents a common-agency model in which a patient and a liability insurer simultaneously contract with the same physician. If the patient and liability insurer can fully coordinate their respective contracts with the physician, legalizing contractual malpractice limits increases aggregate welfare. When coordination is impossible, the patient and liability insurer each free-ride on the incentives furnished by the other to the physician. Provided courts set expected damage awards sufficiently close to what patients would choose for themselves, allowing patients to contract reduces aggregate welfare.;Currently, “customary practice” is the standard of care a provider must meet to escape liability. In the third chapter we derive a “customary-practice” equilibrium. We show that under two malpractice reforms: (1) legislating uniform caps on damage awards and (2) allowing contractual determination of malpractice awards, the equilibrium quality of care will be inefficiently low relative to a social planner's solution. Prohibiting patient-physician contracting for damages is the strictly efficient policy provided courts do not make extreme errors.
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