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The Unexpected Effects of Caps on Non-Economic Damages

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  • Ãlvaro Bustos

    (Escuela de Administración. Pontificia Universidad Católica de Chile.)

  • Ronen Avraham.

Abstract

We study the economic and legal implications of the enactment of caps on noneconomic damages on parties in conflict who know that state supreme courts may strike down the caps as unconstitutional within a few years of enactment. We develop a simple screening model where parties have symmetric expectations regarding the probability of a strike down and asymmetric information regarding plaintiffÂ’s non-economic harm. Our model makes several surprising predictions: First, caps may increase the length of resolution of disputes if the caps are low enough or the probability of a strike down is large enough. Second, although caps always increase the percentage of disputes that are settled out of courts, they do not necessarily save litigation expenses. Third, while caps always reduce the recoveries of plaintiffs with large claims, caps may increase recoveries of plaintiffs with low claims compared to their recoveries in states with no caps. We conclude that to increase welfare legislators have to tailor caps to the economic and constitutional circumstances in their state in ways which we characterize in the paper.

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Bibliographic Info

Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 353.

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Date of creation: 2008
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Handle: RePEc:ioe:doctra:353

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Keywords: Tort reform; caps on recoveries; length of dispute resolution;

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  1. George L. Priest & Benjamin Klein, 1984. "The Selection of Disputes for Litigation," The Journal of Legal Studies, University of Chicago Press, vol. 13(1), pages 1-56, January.
  2. Daniel P. Kessler & Daniel L. Rubinfeld, 2004. "Empirical Study of the Civil Justice System," NBER Working Papers 10825, National Bureau of Economic Research, Inc.
  3. Janet Currie & W. Bentley MacLeod, 2008. "First Do No Harm? Tort Reform and Birth Outcomes," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 795-830, 05.
  4. Holger Sieg, 2000. "Estimating a Bargaining Model with Asymmetric Information: Evidence from Medical Malpractice Disputes," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1006-1021, October.
  5. Danzon, Patricia M., 2000. "Liability for medical malpractice," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 26, pages 1339-1404 Elsevier.
  6. Lucian Arye Bebchuk, 1987. "Suing Solely to Extract a Settlement Offer," NBER Working Papers 2161, National Bureau of Economic Research, Inc.
  7. Schweizer, Urs, 1989. "Litigation and Settlement under Two-Sided Incomplete Information," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 163-77, April.
  8. Landes, William M, 1971. "An Economic Analysis of the Courts," Journal of Law and Economics, University of Chicago Press, vol. 14(1), pages 61-107, April.
  9. Daughety, Andrew F. & Reinganum, Jennifer F., 1994. "Settlement negotiations with two-sided asymmetric information: Model duality, information distribution, and efficiency," International Review of Law and Economics, Elsevier, vol. 14(3), pages 283-298, September.
  10. Babcock, Linda & Pogarsky, Greg, 1999. "Damage Caps and Settlement: A Behavioral Approach," The Journal of Legal Studies, University of Chicago Press, vol. 28(2), pages 341-70, June.
  11. Ronen Avraham, 2007. "An Empirical Study of the Impact of Tort Reforms on Medical Malpractice Settlement Payments," The Journal of Legal Studies, University of Chicago Press, vol. 36(S2), pages S183-S229, 06.
  12. Kessler, Daniel, 1996. "Institutional Causes of Delay in the Settlement of Legal Disputes," Journal of Law, Economics and Organization, Oxford University Press, vol. 12(2), pages 432-60, October.
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Cited by:
  1. Landeo, Claudia & Nikitin, Maxim & Izmalkov, Sergei, 2012. "Playing against an Apparent Opponent: Incentives for Care, Litigation, and Damage Caps under Self-Serving Bias," Working Papers 2012-9, University of Alberta, Department of Economics.

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