Playing against an Apparent Opponent: Incentives for Care, Litigation, and Damage Caps under Self-Serving Bias
AbstractThis paper presents a strategic model of incentives for care and litigation under asymmetric information and self-serving bias, and studies the effects of damage caps. We contribute to the behavioral economics literature by generalizing the perfect Bayesian equilibrium concept to environments with biased litigants. Our main findings are as follows. First, our results suggest that self-serving bias might be welfare-reducing. The negative impact of this cognitive bias on social welfare is explained by the reduction in the level of care, and the increase in the likelihood of disputes. We also find that self-serving bias helps litigants commit to tough negotiation positions. However, it is economically self-defeating for the informed plaintiff. Second, our findings indicate that caps on non-economic damages might reduce the level of care. Importantly, we find that the positive effect of damage caps on lowering the likelihood of disputes, commonly attributed to caps, does not necessarily hold in environments with biased litigants: Caps might induce higher likelihood of disputes. Our findings are aligned with empirical and experimental evidence.
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Bibliographic InfoPaper provided by University of Alberta, Department of Economics in its series Working Papers with number 2012-9.
Length: 43 pages
Date of creation: 12 Apr 2012
Date of revision:
settlement; litigation; incentives for care; caps on non-economic damages; self-serving bias; asymmetric information; apparent opponents; perfect Bayesian equilibrium; motivated reasoning; divergent beliefs; universal divinity refinement; motivated anchoring; non-cooperative games; disputes; pretrial bargaining;
Other versions of this item:
- 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 2012-15, University of Alberta, Department of Economics, revised 01 Oct 2012.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
- J58 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Public Policy
- K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
- K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
- Z18 - Other Special Topics - - Cultural Economics - - - Public Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-23 (All new papers)
- NEP-EXP-2012-04-23 (Experimental Economics)
- NEP-GTH-2012-04-23 (Game Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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