Empirical research on medical malpractice liability has largely ignored incentives to restructure to protect assets. This study provides evidence on asset shielding in the nursing home industry. There was a rapid increase in lawsuits alleging patient neglect or abuse in states with plaintiff-friendly tort environments beginning in the second half of the 1990s. We document two apparent asset-shielding trends in these states during the 1998–2004 period: (1) sales of homes by large chains to smaller, more judgment-proof owners; and (2) a reduced propensity to “brand” chain-owned units with names that linked them directly to the central corporation or sister units. Twelve states enacted tort reforms during the 2003–2006 period that placed caps on noneconomic damages. Using a difference-in-differences (DD) methodology, we find that the trends in asset-shielding behavior abated or reversed in the states that enacted tort reforms. These findings suggest that tort law affects ownership and other organizational choices in this industry.

Malpractice Laws and Incentives to Shield Assets: Evidence from Nursing Homes

The effects of personal bankruptcy law on the activities of traditional credit markets have attracted significant interests in many studies. In this study, we focus on the online Peer-to-Peer (P2P)...

Bankruptcy Exemption and Peer-to-Peer Lending

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.

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

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Dan P. Ly

Papers

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

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