Malpractice risk and medical treatment selection

We study how legal and financial incentives affect medical decisions. Using patient-level data from Italy, we identify the effect of a change in medical liability pressure by exploiting the geographical distribution of hospitals across court districts, where some districts increase the predictability of expected damages per injury while others do not. Using a difference-in-differences identification strategy, we show that as certainty of compensation increases, c-sections increase by 6.5 percentage points. There is no statistically significant effect on secondary health outcomes of either mothers or newborns, but the increase is higher for low-risk than high-risk mothers. The increase is driven by hospitals that have lower quality, are governed by inefficient court districts, face lower expected damages, and are paid more per c-section.