Optimality of no-fault medical liability systems

This paper considers a model of defensive medicine where doctors are imperfect agents of insured patients. A national insurer subsidises both curative and preventive medical care consumed by risk averse patients. We show that in such an environment, the optimal liability regime is similar to the no-fault systems of Sweden and New Zealand where the doctor faces zero liability. The reason is that the subsidy on preventive medicine is a better instrument to induce the optimal level of care than the malpractice regime.