Kathryn Zeiler

Against Endowment Theory: Experimental Economics and Legal Scholarship

Endowment theory holds the mere ownership of a thing causes people to assign greater value to it than they otherwise would. The theory entered legal scholarship in the early 1990s and quickly eclipsed other accounts of how ownership affects valuation. Today, appeals to a generic “endowment effect” can be found throughout the legal literature. More recent experimental results, however, suggest that the empirical evidence for endowment theory is weak at best. When the procedures used in laboratory experiments are altered to rule out alternative explanations, the “endowment effect” disappears. This and other recent evidence suggest that mere ownership does not affect willingness to trade or exchange. Many experimental economists no longer ascribe to endowment theory. Legal scholars, however, continue to rely on endowment theory to predict legal entitlements’ probable effects on expressed valuations. That reliance is no longer warranted. Endowment theory’s influence in legal scholarship provides important lessons about how legal scholars and policymakers should, and should not, use results from experimental economics.

Cautions on the Use of Economics Experiments in Law

The recent move to import empirical results into law and policymaking have introduced challenges related to drawing proper inferences from quantitative studies. The purpose of this essay is to elaborate on three specific cautions on the use of economics experiment results. First, critiques of experiment designs based on external or ecological validity are oftenmisplaced. Second, some legal scholars have fallen into the problematic habit of applying results from experiments directly to law and policy rather than applying well-supported theories. Third, the divergent purposes behind economics studies and legal scholarship give rise, in part, to problematic cherry-picking of experimental studies by legal scholars.

An Empirical Study of the Effects of State Regulations on Medical Malpractice Litigation Decisions

Theoretical work suggests that mandatory disclosure laws (weakly) decrease ex ante expected damages arising from medical malpractice and that medical malpractice damage caps (weakly) increase ex ante expected damages. The empirical tests presented here are designed to test these theoretical predictions. The study uses data on medical malpractice insurance premiums per physician in the 50 U.S. states for the period 1991-2001 as a proxy for ex ante expected damages arising from medical malpractice claims. The data support the prediction that mandatory disclosure laws (weakly) decrease ex ante expected damages. This is true regardless of whether disclosure laws are implemented in the presence of damage caps. With respect to damage caps, the empirical results do not provide strong support for the conventional conjecture, that caps lead to a decrease in ex ante expected damages. These results are consistent with results from previous empirical studies. The theoretical results offer an explanation as to why the data do not support the conventional conjecture.

Do Damages Caps Reduce Medical Malpractice Insurance Premiums?: A Systematic Review of Estimates and the Methods Used to Produce Them

Despite common claims made in policy debates, the theoretical connection between tort reform and medical malpractice insurance premiums is ambiguous. Simple models suggest reforms such as statutory damages caps reduce premiums. More elaborate models that account for changes in physician behavior suggest caps might increase or have no impact on premiums. A number of empirical studies have been conducted to estimate the impacts of caps on premiums, and several qualitative literature reviews have attempted to draw general conclusions from the literature. No review, however, has offered a comprehensive and systematic analysis of the full set of empirical studies. This chapter fills that gap. We provide a first glimpse at the wide methodological variations in the studies that employ regression analysis to estimate the impacts of caps on medical malpractice insurance premiums. We describe 16 empirical studies that report 197 estimates of the impact of caps on premiums. Using a theory-driven framework to develop a set of best practices, we find that little weight can be put on any one study due to broad methodological shortcomings. This chapter highlights the need for better data and additional research on the impact of caps on premiums.